Garden Variety Flower Shop uses 710 clay pots a month. The pots are purchased at
ID: 427115 • Letter: G
Question
Garden Variety Flower Shop uses 710 clay pots a month. The pots are purchased at $2.20 each. Annual carrying costs per pot are estimated to be 50 percent of cost, and ordering costs are $30 per order. The manager has been using an order size of 1,000 flower pots. a.What additional annual cost is the shop incurring by staying with this order size? (Round your optimal order quantity to the nearest whole number. Round all other intermediate calculations and your final answer to 2 decimal places. Omit the "$" 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 size of 1,000)? (Use the rounded order quantity from Part a. Round your final answer to the nearest whole percent. Omit the "%" sign in your response.) About % of the storage space would be needed.
Explanation / Answer
A.
Optimal order quantity = (2*annual demand*ordering cost/carrying cost)^.5
Optimal order quantity = (2*710*12*30/1.1)^.5
Optimal order quantity = 681.71 or 682 clay pots
Cost of optimal order quantity = total carrying cost + total setup cost
Cost of optimal order quantity = (682/2)*1.1 + ((710*12)/682)*30
Cost of optimal order quantity = $749.88
Cost when 1000 unit is ordered = (1000/2)*1.1 + ((710*12)/1000)*30
Cost when 1000 unit is ordered = $805.6
So,
Additional annual cost = 805.6 - 749.88 = $55.72
Additional annual cost = 55.72
B.
As a part of other benefits, use of optimal order quantity requires savings of the storage space.
% Storage space required = 682/1000 = 68.2 (%)
So, 68.2% storage space will be needed with optimal order quantity.
Besides, the loss of clay pots in damage or breakage, will also be prevented.
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