1) (15pts) Tummy Cafe uses frying oil at a steady annual rate of 1,700 liters. F
ID: 410589 • Letter: 1
Question
1) (15pts) Tummy Cafe uses frying oil at a steady annual rate of 1,700 liters. Frying oil is purchased from a local olive processing plant which uses the following pricing pattern: (i) S0.90 per iter if order quantity is less than 200 liters, (ii) $0.85 per liter if order quantity is equal or more than 200 but less than 600 liters,i) S0.80 per liter if order quantity is equal or more than 600 liters. There is also a fixed cost of S110 per order and inventory holding cost is evaluated based on an annual interest rate of 35%. What is going to be the optimal order quantity? What is going to be the optimal annual cost and optimal cycle length'?Explanation / Answer
Demand (D) = 1700
Ordering cost (S) = 110
Holding cost (H) = Price*35%
EOQ = sqrt(2*D*S/H)
a) Let Price be 0.9
EOQ = sqrt(2*1700*110/(0.9*35%)) = 1090
The EOQ is beyond the range
b) Let Price be 0.85
EOQ = sqrt(2*1700*110/(0.85*35%)) = 1121
The EOQ is beyond the range
c) Let Price be 0.8
EOQ = sqrt(2*1700*110/(0.8*35%)) = 1156
So, it satisfies the range
Optimal Order Quantity = 1156
Optimal Annual Cost = Price*D + D/EOQ*S + EOQ/2*(Price*35%) = 0.8*1700 + 1700/1156*110 + (1156/2)*(35%*0.8) = 1683.60
Optimal Cycle Length = EOQ/D = 0.68 years
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