Question

A breakfast cereal manufacturer purchases rolled oats from a supplier based in North Dakota. The supplier charges $1.2 per pound (lb) and $35 per delivery (no matter how much is delivered). The manufacturer's annual holding cost per is 35% of the purchase cost per pound (lb) of rolled oats. The manufacturer uses 5000 pounds (lbs) of rolled oats every week for the production of cereal. Assume that there are 52 weeks in a year.

Required:
How many gallons should the cereal manufacturer order from his supplier with each order to minimize the cost of ordering and holding (Economic Order Quantity)?

Answer 1

EOQ= 6,583 units per order

Step-by-step explanation:

Economic order quantity (EOQ) is the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs.

Economic order quantity (EOQ)= √[(2*D*S)/H]

D= Demand in units

S= Order cost

H= Holding cost

Since:

Demand= 52*5,000= 260,000 pounds

S= $35

H= 0.35*1.2= $0.42

Replacing in the formula:

EOQ= 2√[(2*260,000*35) / 0.42]

EOQ= 6,583 units per order