Question

A restaurant Soup4u uses 60 bags of tomatoes each month. The tomatoes are purchased from a supplier for a price of $80 per bag and an ordering cost of $20 per order. Soup4u's annual inventory holding cost percentage is 40%. Soup4u always uses economic order quantity for deciding how many tomato bags it should order. Which of the following will reduce their inventory to 1/3 of its current value without increasing their cost?

a) Reduction in ordering cost to 1/9 of it current value
b) Increasing holding cost to 9 times its current value
c) Reduction in ordering cost to 1/3 of it current value
d) Increasing holding cost to 3 times its current value

Answer 1

a) Reduction in ordering cost to 1/9 of it current value

Step-by-step explanation:

EOQ = √(2SD/H)

• S = ordering cost = $20
• D = annual demand = 60 x 12 = 720 bags
• H = annual holding cost = $80 x 40% = $32

EOQ = √[(2 x $20 x 720) / $32] = 30

if you want to reduce inventory to 1/3 of its current value, then the order quantity should be 30 x 1/3 = 10 units per order

a) Reduction in ordering cost to 1/9 of it current value

EOQ = √[(2 x $20/9 x 720) / $32] = 10 ✓

inventory is decreased to 1/3 of current level