23. Restaurant A uses 60 bags of tomatoes each month. The tomatoes are purchased
ID: 371385 • Letter: 2
Question
23. Restaurant A uses 60 bags of tomatoes each month. The tomatoes are purchased from a supplier for a price of $80 per bag and an ordering cost of S20 per order. Restaurant A's annual inventory holding cost percentage is 40%. If Restaurant A chooses to use the economic order quantity when placing an order for tomatoes, what are its ordering and holding costs per year expressed as a percentage of the annual purchasing cost? 24. Store uses the newsvendor model to manage its inventory. Demand for its product is normally distributed with a mean of 500 and a standard deviation of 250. Store A purchases the product for S10 each unit and sells each for S30. Inventory is salvaged for $5. What is its expected profit if Store A's order quantity is 400 units?Explanation / Answer
Answer 23
Here we need to calculate the economic order quantity
The economic Order quantity is given by the formula
Economic Order Quantity = Squareroot (2 *Annual Demand*Order Cost / Holding Cost)
Annual Demand = 12* Monthly Demand = 12* 60 = 720 nos.
Ordering Cost = 20 / order
Inventory Holding Annual Cost = 40% * 80= 32
Economic Order Quantity = Squareroot (2 *Annual Demand*Order Cost / Holding Cost)
Economic Order Quantity = Squareroot (2 *720 *20 / 32)
Economic Order Quantity = Squareroot (28800 / 32)
Economic Order Quantity = Squareroot (900) = 30
So the Economic Order Quantity is 30 nos.
Total Ordering Cost = Total No of order * Unit Order
Total No. of Order = Annual Demand / Economic Order Quantity = 720/30 = 24 nos.
Unit Order Cost = 20 / order
Total Ordering Cost = Total No of order * Unit Order = 24 * 20 = 480
Total Yearly Purcahsing Cost = Annual Demand * Unit Purchase Cost = 720 * 80 = 57600 nos.
Ordering cost in terms of percentage of annual purchase cost = Order Cost / Annual Purchase Cost = 480 / 57600 = 0.83 %
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