Question

Question 2 (10 points) The IBP Grocery orders most of its items in lot sizes of 10 units. Average annual demand per side of beef is 720 units per year. Ordering costs are $25 per order with an average purchasing price of $100. Annual inventory carrying costs are estimated to be 40% of the unit cost. Required: 1. Determine the economic order quantity (3 points). 2. Determine the annual cost savings if the shop changes from an order size of 10 units to the economic order quantity (4 points) 3. "To determine the Economic Order Quantity, the relevant ordering costs are maximized and the relevant carrying costs are minimized." True or False? Briefly discuss why (max 2 sentences). (3 points).

Answer 1

2DS Н Q = EOQ units D= Demand in units (720) S = Order cost ($25) H= Holding Costs ($40) 1Q = EOQ units = V[(2 x 720 x $25)/$40] = 30 units 2 Current 10-units order: Ordering costs ($25 x 720/10) Carrying costs ($100 x 0.40 x 10/2) EOQ 30-units order: Ordering costs ($25 x 720/30) Carrying costs ($100 x 0.40 x 30/2) $1,800 $200 $2,000 $600 $600 Annual savings $1,200 S800 3 False, We minimize both relevant ordering costs and relevant carrying costs.