Garden Variety Flower Shop uses 850 clay pots a month. The pots are purchased at
ID: 367981 • Letter: G
Question
Garden Variety Flower Shop uses 850 clay pots a month. The pots are purchased at $3.50 each. Annual carrying costs per pot are estimated to be 30 percent of cost, and ordering costs are $20 per order. The manager has been using an order size of 1,500 flower pots. a.What additional annual cost is the shop incurring by staying with this order size? (Round your optimal order quantity to the nearest whole number. Round all other intermediate calculations and your final answer to 2 decimal places. Omit the "$" sign in your response.) Additional annual cost $ b.Other than cost savings, what benefit would using the optimal order quantity yield (relative to the order siz rounded order quantity from Part a e of 1,500)? (Use the sign in your response. Round your final answer to the nearest whole percent. Omit the % About 7% of the storage space would be needed.Explanation / Answer
a)Optimal order quantity = sqrt(2DS/H)
D- Annual Demand
S- Ordering cost per order
H - Holding cost per unit
D = 850*12 = 10200
S = $20
H = 30 % of cost = 0.3*3.5 = $ 1.05 per unit
Optimal order quantity (Q)= sqrt((2*10200*20)/1.05) = 623.35 = 623( rounding off)
Total cost , when Optimal order = (D/Q)*S+(Q/2)*H
=(10200/623)*20+(623/2)*1.05
= $ 654.52
Total cost, when order size Q-1500 = (10200/1500)*20+(1500/2)*1.05
= $ 923.5
Additional Annual cost = 923.5 - 654.52 = $268.98
b)
Average inventory in case of optimal order quantity = 623/2 = 311.5
Average inventory when order size is 1500 = 1500/2 = 750
% of space required more when order size is 1500 = ((750-311.5)/311.5)*100 = 140.77%
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