Problem C (10 points) Veritable Vegetables makes canned soups. Veritable orders
ID: 2546716 • Letter: P
Question
Problem C (10 points) Veritable Vegetables makes canned soups. Veritable orders 10,000 cases of frozen broccoli per year from Billy Goat Farms. You have the following additional information: . The average cost (in the purchasing and accounting departments) to place and process a single order with Billy Goat Farms is S5. Farms is $20 The current purchase price of one case of broccoli is $40. . The average cost (in the factory) to receive and inspect a single order received from Billy Goat . The average annual cost to hold a case of broccoli in inventory is $8. Given the information above and using the techniques learned in class: How many cases should the purchasing manager order at the reorder point? Assuming Veritable Vegetables purchases in the quantity determined in a, what's the total annual cost of ordering and carrying cases of frozen broccoli in inventory? a. b. SHOW YOUR WORK!Explanation / Answer
Problem C:
a. Reorder point, EOQ = [(2*Qty demanded *Cost per order)/(carrying cost per unit)]^(1/2)
Reorder point = [(2*10000*25)/(8)]^(1/2) = 250 cases
b. total annual cost of ordering = number of orders * cost per order = (10000/250)*25 = $1000
carrying cost = Average inventory held * carrying cost per unit = ((250+0)/2)*8 = $1000.
Part D.
a. If orders are made in qty of 2000 cases, then:
total annual cost of ordering = number of orders * cost per order = (10000/2000)*25 = $125
carrying cost = Average inventory held * carrying cost per unit = ((2000+0)/2)*8 = $8000.
Annual cost reduction due to discount = 10000*(40-39.60) = $4000
Net annual purchases cost of ordering in batches of 2000 cases= 125+8000-4000 = $4125, which is much higher than annual cost of ordering at the EOQ of $2000 (1000+1000). Therefore Veritable vegetables should continue to order at EOQ.
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