Answer :
Answer:
Additional cost= $570
Explanation:
Monthly demand = 750
Annual demand (D) = Monthly Demand x Number of months in a year
Annual demand (D) = 750 x 12 = 9,000
Cost (C) = $2.00 each
Annual carrying costs (Cc) = 30 percent of cost
Annual carrying costs (Cc) = 30% of $2.00 = $0.60
Ordering costs (Co) = $20
Current order quantity (Q1) = 1,500
Solution:
(a) Current cost is calculated as,
Current cost = Annual carrying costs + Annual ordering costs
Current cost = [(Quantity / 2) x Carrying cost] + [(Annual demand / Current Quantity) x Ordering cost]
Current cost = [(1500 / 2) x $0.60] + [(9000 / 1500) x $20]
Current cost = $450 + $120
Current cost = $570
If Garden Variety Flower Shop uses 750 clay pots a month. The pots are purchased at $2 each. Annual carrying costs per pot are estimated to be 30 percent of cost, and ordering costs are $20 per order. The manager has been using an order size of 1,500 flower pots:
- a. What additional annual cost is the shop incurring by staying with this order size will be: $105.24
- b. What benefit would using the optimal order quantity yield will be 51.63%
a. Additional annual cost
Annual demand (D) =$750 x 12= $9,000
Ordering cost=$20 per order
Annual carrying costs(H)=0.30 ×$2.00 = $0.60
Order Quantity(Q) = 1,500
Find TC for Q
TC=Q÷2×H + D÷Q × S
TC=1,500÷2 × $0.60 + $9,000÷1,500×$20
TC=$450+$120
TC=$570............. (1)
Now find Qo
Qo=√2DS÷H
Qo=√2×$9,000×$20÷0.60
Qo=√600,000
Qo=$774.596
Qo=$774.60 (Approximately)
Find TC for Qo
TC=Q÷2×H + D÷Q ×
TC=774.60÷2 × $0.60 + $9,000÷774.60×$20
TC=$232.38+$232.38
TC=$464.76................(2)
Now let determine the additional annual cost
Additional annual cost=$570-$464.56
Additional annual cost=$105.24
b. Benefit would using the optimal order quantity yield (relative to the order size of 1,500)
Benefit=Qo÷Q
Benefit=$774.60÷1,500×100
Benefit=51.63%
The benefit is that about 51.63% of the storage space would be needed.
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