Question

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B Valley Natural Foods Soap EOQ Problem B Valley Natural Foods is a retailer that sells a brand of soap with all natural ingredients. (They do not make the soap; they buy it from a supplier.) The following data should be used in your calculations. Demand/Sales = 10 cases of soap per month (you will need to convert this to an annual amount) $20 per order Ordering Cost = Carrying Charge Unit Cost = $40 per case Answer the following questions and be sure to show your computations. You can use whatever symbol you need for square root, if typing in Word. 1. How many cases should be ordered at a time? (This number will be the EOQ) 2. How often should the soap be ordered? 3. Answer all three: a. What is the annual cost or ordering the soap? b. What is the annual cost of carrying the soap? c. What is the total cost (ordering and carrying costs added together)? 4. List three distinct factors might that would cause the firm to order a larger or smaller amount of soap than the EOQ. Scoring Grid-next page

Answer 1

Cases to be ordered at a time = $\sqrt{}$ 2* Annual Demand * Buying cost per order / Carrying cost per unit per annum

= $\sqrt{}$ 2 * (10*12) * 20 / (15% * 40) = 28.28 Cases per order

No of times to order = annual demand / EOQ = 120/28.28 = 4.24 times = 12/4.24*30 = 85 days

I.e Once in every 85 days an order has to be placed

Annual cost of ordering the soap = No of orders in a year * Ordering cost per order = 4.24 * 20 = $ 84.8

Annual Carrying cost = Quantity per order / 2 * Holding cost per unit per annum = 28.28 / 2 * (15% * 40) = $ 84.84

Total Cost per annum = Annual ordering cost + Annual carrying cost = 84.8 + 84.84 = $ 169.64

Factors that might influence the firm to buy at a quantity other than EOQ may be:

1. Seasonal availability of the product

2. Taxes and discounts

3. Shelf Life of the product