Sarah’s Organic Soap Company makes four kinds of organic liquid soap- “regular”,

Question

Sarah’s Organic Soap Company makes four kinds of organic liquid soap- “regular”, “lavender”, “citrus” and “tea tree”. Sarah needs to purchase organic Palm oil to make her soaps. She needs 1,000 kgs of Palm oil per day on average. The supplier charges a $60 delivery fee per order (which is independent of the order size) and $4.75 per kg. Sarah’s annual holding cost is 25%. Assume 52 weeks per year and 5 days per week. If Sarah wants to minimize inventory holding and ordering costs, how much Palm oil should she purchase with each order (in kgs)? Show Calculation.

Explanation / Answer

Ordering Cost and Holding Costs are minimized at EOQ level of inventory Annual Demand (1000 units per day * 52 weeks * 5 days per week) 260000 Ordering Cost $         60.00 Holding Cost - 25% of Price ($4.75) $       1.1875 EOQ = 2AO / H where A = Annual Demand O = Ordering Cost per order H = Holding Cost per unit per annum EOQ = 2AO / h = (2 * 260000 * 60) / 1.1875 = 5125.786 units or, 5126 units should be purchsed with each order Total Holding Cost (Average Inventory * Holding Cost per unit = EOQ/2*$1.1875) $3,043.56 Total Ordering Cost (No of orders * Ordering Cost = Annual Demand/EOQ *$60) $3,043.31 Total Cost (Minimum) $6,086.87

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