Question

Open all year round except for five days off during certain holidays, a bakery (Pide Inc.) buys flour in 3U kg bags at $50 per bag from an international supplier. Pide uses an average of 60 bags of flour a month. Preparing an order, receiving the shipment, and paying the invoice cost $2,000 per order. The inventory carrying cost rate is 10%. The order delivery lead time is 25 days.

a) Currently, Pide places an order every month (call this policy A). Determine this policy's current order size and the total cost of operating inventory (i.e., the sum of annual ordering and carrying costs

Answer 1

The current order size for policy A is 48 bags, and the total cost of operating inventory is $30,120.

Step-by-step explanation:

The current order size for policy A is determined using the economic order quantity (EOQ) formula. The EOQ formula is given by: EOQ = sqrt(2SD/H), where S is the setup cost per order, D is the annual demand, and H is the inventory holding cost rate.

In this case, the setup cost per order is $2,000, the annual demand is 60 bags per month * 12 months = 720 bags, and the inventory holding cost rate is 10% = 0.1.

Using these values, we can calculate the EOQ: EOQ = sqrt((2 * $2,000 * 720) / 0.1) = 48 bags.

The total cost of operating inventory can be calculated by summing the annual ordering cost and the annual carrying cost. The annual ordering cost is given by: (D/EOQ) * S, and the annual carrying cost is given by: (EOQ/2) * H * P, where P is the price per bag.

Plugging in the values: annual ordering cost = (720/48) * $2,000 = $30,000 and annual carrying cost = (48/2) * 0.1 * $50 = $120. The total cost of operating inventory is $30,000 + $120 = $30,120.