Question

6.3) Annie Lennox recently took over a cleaning supply store. Her predecessor always ordered carpet shampoo in quantities of 100 units. Annie is reevaluating this policy. Based on her analysis, the cost to place each order is $35 and the holding cost is $8 per shampoo bottle per year. The annual demand for this product is 2500 bottles. Should Anne change the current order policy and, if so, how much can she save

Answer 1

Annie should increase the order size to 148 bottles per order and she will be able to save $91.85 per year.

Step-by-step explanation:

we must calculate the economic order quantity (EOQ) in order to determine the size of the order that reduces costs:

EOQ = √[(2 x S x D) / H]

• S = cost per order = $35
• D = annual demand = 2,500 bottles of shampoo
• H = holding cost per unit) = $8

EOQ = √[(2 x 35 x 2,500) / 8] = √(175,000 / 8) = √21,875 = 147.90 ≈ 148 bottles of shampoo

total cost when ordering 100 bottles = (25 orders x $35) + (100/2 x $8) = $875 + $400 = $1,275

total cost when ordering 148 bottles = (16.89 orders x $35) + (148/2 x $8) = $591.15 + $592 = $1,183.15

Annie will save $1,275 - $1,183.15 = $91.85 per year