Question

Bakery Y uses 300 bags of flour each month. The flour is purchased from a supplier for a price of $100 per bag and an ordering cost of $10 per order. Bakery Y’s annual inventory holding cost is 20% of the item value. Bakery Y is required to order an integer multiple of 50 bags. What order quantity should Bakery Y use to minimize the sum of ordering and holding costs? ____ bags (round up to the nearest integer).

Answer 1

To minimize the sum of ordering and holding costs, Bakery Y should order 50 bags of flour.

Step-by-step explanation:

To determine the order quantity that minimizes the sum of ordering and holding costs, we need to find the Economic Order Quantity (EOQ). The EOQ formula is:

EOQ = √(2 * D * S / H)

Where:

• D = annual demand (300 bags)
• S = ordering cost per order ($10)
• H = annual holding cost per unit ($100 * 0.2)

Plugging in the values, we get:

EOQ = √(2 * 300 * 10 / (100 * 0.2)) = 34.64

Since Bakery Y is required to order an integer multiple of 50 bags, the order quantity should be rounded up to the nearest integer, which is 50 bags.