Garden Variety Flower Shop uses 890 clay pots a month. The pots are purchased at
ID: 453041 • Letter: G
Question
Garden Variety Flower Shop uses 890 clay pots a month. The pots are purchased at $3.70 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 $ 156.60
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.
Part B is the section I'm having trouble with. I posted part A in case it was needed.
Explanation / Answer
Economic Order quantity
D = Annual demand = 890*12 = 10680 units
Co = Order cost per order = 30
Ch = Annual holding cost per unit in inventory = 50% of 3.7 = 1.85
EOQ = ((2*D*Co) / Ch)
EOQ = (( 2* 10680*30) / 1.85)
EOQ = 588.53 587
Original order size = 1000
Current order size = 587
Percentage reduction in space is equivalent to percentage reduction in inventory, as per unit space requirement is same in both cases.
Therefore,
% reduction in space = (Original order size – Economic order size) / Original order size
% reduction in space = (1000-587) / 1000
% reduction in space = 0.413
% reduction in space = 41.30 %
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