Garden Variety Flower Shop uses 810 clay pots a month. The pots are purchased at
ID: 424624 • Letter: G
Question
Garden Variety Flower Shop uses 810 clay pots a month. The pots are purchased at $3.30 each. Annual carrying costs per pot are estimated to be 2 manager has been using an order size of 1,750 flower pots. 0 percent of cost, and ordering costs are $15 per order. The a. What additional annual cost is the shop incurring by staying with this order size? (Round optimal order quantity to the nearest whole number. Round all other intermediate calculations and your final.answer to 2 decimal places. Omit the "$" 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 size of 1,750)? (Use the rounded order quantity from Part a. Round your final answer to the nearest whole percent. Omit the "%" sign in your response.) About 1 % of the storage space would be neededExplanation / Answer
Following are the relevant details required for calculation :
Annual demand for clay pots = D = 810 / month x 12 months = 9720 pots
Annual unit inventory carrying cost = Ch = 20 % of $3.3 = $ 0.66
Ordering cost = Co = $15 per order
Therefore ,
Economic order quantity ( EOQ )
= Square root ( 2 x Co x D / Ch )
= Square root ( 2 x 15 x 9720 / 0.66)
= 664.69 ( 665 rounded to nearest whole number )
Total annual inventory cost
= Annual ordering cost + Annual inventory carrying cost
Total annual inventory cost for EOQ = 665
Annual ordering cost
= Ordering cost x Number of orders
= Ordering cost x annual demand / Order quantity
= $15 x 9720 / 665
= $219.25
Annual inventory carrying cost
= annual inventory holding cost x Average inventory
= Annual inventory holding cost x Order quantity / 2
= 0.66 x 665/2
= $$219.45
Total annual inventory cost = $219.25 + $219.45 = $438.70
Total annual inventory cost for order quantity = 1750 flower pots :
Annual ordering cost
= Ordering cost x Number of orders
= Ordering cost x annual demand / Order quantity
= $15 x 9720 / 1750
= $ 83.31
Annual inventory carrying cost
= annual inventory holding cost x Average inventory
= Annual inventory holding cost x Order quantity / 2
= 0.66 x 1750/2
= $577.5
Total annual inventory cost = $83.31 + $577.5 = $660.81
Therefore ,
Additional annual cost = $660.81 - $438.70 = $222.11
ADDITIONAL ANNUAL COST = $222.11
Since EOQ of 665 < Existing order quantity of 1750,
Storage space requirement for EOQ of 665 will be proportionately less than existing order quantity .
Therefore, percentage of storage space which would be required
= EOQ / existing order quantity
= 665/1750
= 38%
ABOUT 38% OF THE STORAGE SPACE WOULD BE NEEDED
ADDITIONAL ANNUAL COST = $222.11
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