3. Groundz Coffee Shop uses 4 pounds of a specialty tea weekly; each pound costs

Question

3. Groundz Coffee Shop uses 4 pounds of a specialty tea weekly; each pound costs $16. Carrying costs are $0.25 per pound. It costs the firm $8 to prepare an order. Assume the basic EOQ model with no shortages applies. Assume 52 weeks per year. a. How many pounds should Groundz order at a time? b. What is total annual cost (excluding item cost) of managing this item on a cost-minimizing basis? c. What is the annual ordering cost? Annual holding cost? Why are they equal? d. The current practice is to order for two weeks of demand (8pounds). Which cost will go up and which cost will go down and why?

Explanation / Answer

Annual Demand of Tea (4 * 52) 208 Ordering Cost $       8.00 Holding Cost $       0.25 a. EOQ = 2AO / H where A = Annual Demand O = Ordering Cost per order H = Holding Cost per unit per annum EOQ = 2AO / H = (2 * 208 * 8) / 0.25 = 115.3776 Total Holding Cost (Average Inventory * Holding Cost per unit) ( EOQ/2 * $0.25) $14.42 Total Ordering Cost (No of orders * Ordering Cost) (Annual Demand/EOQ * 8) $14.42 Total Cost $28.84 b. Total Cost of Managing Inventory = $28.84 c. Total Ordering Cost = $14.42 d. Total Holding Cost = $14.42 e. At EOQ, both holding cost and ordering cost are lowest and equal which minimizes the annual inventory cost. This makes EOQ the optimum order quantity. Current Order Size = 2 weeks demand = 2 * 4 = 8 units No of Orders = 208 / 8 = 26 Ordering Cost = 26 * $ 8 = $208 Carrying Cost = 8/2 * $0.25 = $1 Ordering Cost will increase and carrying cost will decrease. This is because number of orders increase and the average inventory in hand decreases

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.