Sam's Cat Hotel operates 51 weeks per year, 6 days per week, and uses a continuous...

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Sams Cat Hotel operates 51 weeks per year, 6 days per week, and uses a continuous review inventory system. It purchases kitt

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Answer 1

Answer #1

For weekly demand of 80 bags

Average weekly demand (d) = 80 bags
Number of weeks per year = 51
Annual demand (D) = 80 × 51 = 4080 bags
Ordering cost (S) = $58
Holding cost (H) = 40% of cost = 40% of $12.50 = $5
Economic order quantity (Q) = √(2DS/H) = √[(2 × 4080 × 58) / 5] = √(473280/5) = √94656 = 308 bags
Annual ordering cost = (D/Q) S = (4080/308) 58 = $768.31
Annual holding cost = (Q/2) H = (308/2) 5 = $770
Total annual cost for 80 bags per week = Annual ordering cost + annual holding cost = $768.31 + $770 = $1538.31

For weekly demand of 55 bags

Average weekly demand (d) = 55 bags
Number of weeks per year = 51
Annual demand (D) = 55 × 51 = 2805 bags
Ordering cost (S) = $58
Holding cost (H) = 40% of cost = 40% of $12.50 = $5
Economic order quantity (Q) = √(2DS/H) = √[(2 × 2805 × 58) / 5] = √(325380/5) = √65076 = 255 bags
Annual ordering cost = (D/Q) S = (2805/255) 58 = $638
Annual holding cost = (Q/2) H = (255/2) 5 = $637.5
Total annual cost for 55 bags per week = Annual ordering cost + annual holding cost = $638 + $637.5 = $1275.5

Total cost for 80 bags per week - Total cost for 55 bags per week = $1538.31 - $1275.5 = $262.81

So the cost will be $262.81 higher owning to the error in EOQ

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