Question

A bakery buys sugar from a big distributor to use in baking cakes. Typically, they use 3663 bags of sugar in a year. The price of sugar is typically $14 per bag. The cost to the bakery for placing an order is $26, and the annual carrying cost is $17 per bag. The distributor has offered the bakery the following volume discount schedule:

Order Size	Discount rate on the original price
1--449	0 percent
450--799	5 percent
more than 800	10 percent

We are trying to find how many bags of sugar should the store order, whenever they place a new order of sugar. Assume 364 days a year and 52 weeks a year.
IMPORTANT: Note, the discounts off of original price are reported. You need to calculate the actual prices.

If we ignore the discounts, how many bags of sugar should we order?

1. Fill in the blanks

Order Quantity	Unit Price to Pay	Total Annual Inventory Related Cost
Quantity from EOQ model
Enough to get 5 percent discount
Enough to get 10 percent discount

3. Based on this quantity discount information, how may bags of sugar should the store order?  
4. How often (in "days") should the bakery order?  

Answer 1

Calculation of EOQ

Calculation of Unit price per pay and Annual Inventory related cost

Particulars	Order Size(Q)	No. of Orders A/Q (bags)	Cost of Purchase A*Price	Ordering Cost A/Q*26	Carrying Cost Q/2*C	Total Cost($)	Total cost per unit($)
Quantity from EOQ model	106	3663/106 =34.56	3663*14 =51282	3663/106*26 =898.47	106/2*17 =901	53081.47	14.49
Enough to get 5 percent discount	450	3663/450 =8.14	3663*13.3 =48717.9	3663/450*26 =211.64	450/2*17 =3825	52754.54	14.40
Enough to get 10 percent discount	801	3663/801 =4.57	3663*12.6 =46153.8	3663/801*26 =118.90	801/2*17 =6808.5	53081.2	14.49

The above table Shows that the total cost of 3663 sugar bags including ordering and carrying cost is minimum where the order size is 450 therefore most economic purchase level is 450 Bags.

No of days in which bakery should order

=3663/450

=8.14 Orders

No of days in year=364

Therefore 364/8.14

=44.71 i.e 45 days