Question

A supplier of feed sells a special type of broiler starter to poultry farmers in Lilongwe. The annual demand is approximately 1,200 bags each weighing 20 kilograms. The supplier estimates that one bag costs him MWK11,200 and estimates that the annual holding cost is 30 percent of the bag's value. It costs approximately MWK80 to place an order (managerial and clerical costs). The supplier currently orders 100 bags per month. (a) Determine the ordering, holding, and total inventory costs for the current order quantity. (b) Determine the economic order quantity (EOQ). (c) How many orders will be placed per year using the EOQ? (d) Determine the ordering, holding, and total inventory costs for the EOQ. How has ordering cost changed? Holding cost? Total inventory cost?​

Answer 1

To determine the ordering, holding, and total inventory costs for the current order quantity, use the formulas: Ordering Cost = (Annual demand / Order quantity) * Ordering cost per order, Holding Cost = (Order quantity / 2) * Holding cost per bag, Total Inventory Cost = Ordering Cost + Holding Cost. For the Economic Order Quantity (EOQ), use the formula: EOQ = sqrt((2 * Annual Demand * Ordering cost per order) / Holding cost per bag). The ordering cost remains the same for the EOQ, while the holding cost and total inventory cost are also the same.

Step-by-step explanation:

To determine the ordering, holding, and total inventory costs for the current order quantity, we can use the following formulas:

Ordering Cost = (Annual demand / Order quantity) * Ordering cost per order

Holding Cost = (Order quantity / 2) * Holding cost per bag

Total Inventory Cost = Ordering Cost + Holding Cost

Given the annual demand of 1,200 bags, the order quantity of 100 bags per month, and the costs provided, we can substitute these values into the formulas to calculate the costs.

(a) Ordering Cost = (1200 bags / 12) * MWK80 = MWK800

Holding Cost = (100 bags / 2) * (MWK11,200 * 0.3) = MWK168,000

Total Inventory Cost = MWK800 + MWK168,000 = MWK168,800

(b) To determine the Economic Order Quantity (EOQ), we can use the formula: EOQ = sqrt((2 * Annual Demand * Ordering cost per order) / Holding cost per bag)

Substituting the given values into the formula, we can calculate the EOQ.

EOQ = sqrt((2 * 1200 * MWK80) / (MWK11,200 * 0.3)) = 100 bags

(c) To calculate the number of orders placed per year using the EOQ, we can divide the annual demand by the EOQ.

Number of orders = Annual demand / EOQ = 1200 bags / 100 bags = 12 orders

(d) To determine the ordering, holding, and total inventory costs for the EOQ, we can use the same formulas as in part (a), but substitute the EOQ for the order quantity.

Ordering Cost = (1200 bags / 12) * MWK80 = MWK800

Holding Cost = (100 bags / 2) * (MWK11,200 * 0.3) = MWK168,000

Total Inventory Cost = MWK800 + MWK168,000 = MWK168,800

The ordering cost remains the same as in the current order quantity, while the holding cost and total inventory cost are also the same as in the current order quantity.