Question

Floral Beauty, Inc., is a large floral arrangements store located in Asheville Mall. Bridal Lilies, which are a specially created bunch of lilies for bridal bouquets, cost Floral Beauty $19 each. There is an annual demand for 22,000 Bridal Lilies. The manager of Floral Beauty has determined that the ordering cost is $85 per order, and the carrying cost, as a percentage of the unit cost, is 14%. Floral Beauty is now considering a new supplier of Bridal Lilies. Each lily would cost only $17.50, but to get this discount, Floral Beauty would have to buy shipments of 2,000 Bridal Lilies at a time. Should Floral Beauty use the new supplier and take this discount for quantity buying?

a. What is the total annual inventory cost (including purchase cost) for the current supplier?
b. What is the annual holding cost for the new supplier (when purchasing 3,000 each order)?
c. What is the total annual inventory cost (including purchase cost) for the new supplier (when purchasing 3,000 each order)?
d. What should Floral Beauty do?

Answer 1

a) Total annual inventory cost (including purchase cost) for the current supplier = $421,154

b) Annual holding cost for the new supplier (when purchasing 3,000 each order) = $3,675

c) Total annual inventory cost = $389,298

d) Since the total cost has reduced, Flora Beauty should choose the new supplier option.

Step-by-step explanation:

Annual demand, D = 22,000

Unit cost, C = $19

Ordering cost, K = $85

Unit carrying cost, h = 14% of C

h = 0.14*19 = $2.66

(a) Total annual inventory cost for the current supplier,
`T_c`

`T_c = (D*C) + ((Q'h)/(2) ) + (DK)/(Q')`...........(1)

Economic order quantity,Q'

`Q' = √(2DK/2.66) \\Q' = √(2*22000*85/2.66)\\Q' = 1186 units`

Su bstitute Q' and other parameters into Tc

`T_c = (D*C) + ((Q'h)/(2) ) + (DK)/(Q')`

`T_c = (22000*19) + (1186*2.66)/(2) + (2000*85)/(1186) \\T_c = \$421,154`

(b)

Q = 3000

C = $17.50

h = 0.14*17.50 = 2.45

Annual holding cost for the new supplier = (Q/2)*h = (3000/2)*2.45 = $3,675

(c)

Total annual inventory cost = (D*C) + (Q/2)*h + (D/Q)*K

Total annual inventory cost = (22000*17.5) + (3000/2)*2.45 + (22000/3000)*85

Total annual inventory cost for the new supplier = $389,298

d)

Since the total cost has reduced, Flora Beauty should choose the new supplier option.