Question

Problem 13-3 A large bakery buys flour in 25-pound bags. The bakery uses an average of 1,215 bags a year. Preparing an order and receiving a shipment of flour involves a cost of $10 per order. Annual carrying costs are $75 per bag. a. Determine the economic order quantity. (Round your final answer to the nearest whole number.) Economic order quantity bags b. What is the average number of bags on hand

Answer 1

a) Economic order quantity = 18 bags

b) The average inventory = 9 bags

Step-by-step explanation:

The Economic Order Quantity (EOQ) is the order quantity that minimizes the balance of holding cost and ordering cost. At the EOQ, the holding cost is exactly the same as the ordering cost.

It is calculated as follows:

EOQ = √(2× Co D)/Ch)

Co- ordering cost Ch - holding cost, D- annual demand

Co- 10, Ch- 75, D - 1,215

So we apply the formula:

EOQ =√ (2× 10 × 1215/75) = 18 bags

Economic order quantity = 18 bags

The average inventory = Order quantity/ 2

= 18/2 = 9 bags