1. The Sun Up Convenience Store is open 365 days a year. Sun Up sells 30 bottles
ID: 330537 • Letter: 1
Question
1. The Sun Up Convenience Store is open 365 days a year. Sun Up sells 30 bottles of Electric Energy Drink each day. It costs $10.00 for Sun Up to order Electric Energy Drink, regardless of the size of the order. The distributor of Electric Energy Drink sells Electric Energy to Sun Up for $0.50 a bottle, and the distributor delivers Electric Energy exactly four days after Sun Up places an order. If Sun Up were to hold one bottle of Electric Energy Drink in inventory for one year, it would cost Sun Up four times (or 400% of) the bottle's cost. ANSWER ALL PARTS TO GET FULL CREDIT! a) What order size will minimize Sun Up's costs? What is the total cost of this order size? b) Using the order size that will minimize Sun Up's total costs, how many bottles of Electric Energy Drink, on average, will be in inventory? c) Using the minimum cost order size, how frequently will Sun Up order Electric Energy Drink? d) Now suppose that the Electric Energy Drink distributor has just made Sun Up an offer: if Sun Up orders at least 1,000 bottles at a time, than the distributor will charge only $0.45 for each bottle. What should Sun Up do now?Explanation / Answer
a) Given are following details :
Annual demand of bottles for sun Up convenience store = D = 30 bottles/ day x 365 days = 10950 bottles
Ordering cost = Co = $10
Annual unit holding cost = Ch = 400% of $0.50 = $ 2
Order size that will minimize total cost ( EOQ )
= Square root ( 2 x Co x D / Ch)
= Square root ( 2 x 10 x 10950 / 2 )
= 330.90 ( 331 rounded to nearest whole number )
Annual purchasing cost = $0.5 / bottle x 10950 bottles = $5475
Annual ordering cost = Ordering cost x Number of orders = Co x Annual demand /EOQ = $10 x 10950/331 = $330.81
Annual holding cost = annual unit holding cost x average inventory = Ch x EOQ/ 2 = $2 x 331/2 = $331
Total annual cost of the order size = Annual purchasing cost + annual ordering cost+ annual holding cost= $5475+$330.81+$331= $6136.81
B ) Number of bottles which will be in inventory on average = EOQ / 2 = 331/2 = $165.5
c)Frequency with which Sun up will order Electric energy drink
= EOQ / Daily demand
= 331/30 days
= 11.03 days
SUN UP WILL ORDER ELECTRIC ENRGY DRINK EVERY 11.03 DAYS
a) At order quantity minimum 1000 bottles ,
Annual unit holding cost = Ch1 = 400% $0.45 = $1.80
Revised order quantity ( EOQ1 )
= Square root ( 2 x Co x D / Ch1 )
= Square root ( 2 x 10 x 10950 / 1.80 )
= 348.80 ( 349 rounded to nearest whole number )
It is however not possible to have an optimum order quantity 349 for corresponding quantity slab of 1000 +
However we will calculate total cost for order quantity = 1000 which will be as per following :
Annual purchasing cost = $0.45 x 10950 = $4927.50
Annual holding cost = Ch1 x Order size/2 = $1.80 x 1000/2 = $900
Annual ordering cost = Co x annual demand / Order size = $10 x 10950 /1000 = $109.50
Total cost = $4927.50 + $900 + $109.50 = $5937
Since total annual cost of order size 100 ( which is $5937 ) < Total cost of EOQ order size ( which is $6136.81 )., Sun Up should order at least 1000 bottles per order
SUN UP WILL ORDER ELECTRIC ENRGY DRINK EVERY 11.03 DAYS
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