40Spring 2015



Part I-Problems:

1. Maria’s Bakery has just estimated the forecast for annual flour consumption as 500,000 pounds. Bakery buys flour from a local grocery in 25-pound bags, where each bag costs $40. The grocery charges $100 for each shipment. Maria’s Bakery uses a 10% opportunity cost of capital.

a) Determine the economic order quantity.

C= $40 K= $100 D= 500,000 / year

Opportunity Cost= 10%

b) What is the average number of bags on hand?

c) How many orders per year will there be?

d) Compute the total cost of ordering and carrying flour in a year.

e) Maria on her way to work saw an advertisement from the supermarket saying “Every day low prices: $30 for 25 lbs. flour bag…” and “…we charge $120 per shipment”. Should Maria follow up the ad and order from the supermarket instead of the local grocery? [Hint: Use cost analysis]

2. Jerald a local plant nursery uses 100 clay pots and 900 plastic pots a month. He purchases each clay pot from $40 and each plastic pot from $20 from a local pot producer. Jerald pays $100 per order delivery. Monthly carrying costs per pot estimated to be 20% and 10% for clay and plastic pots respectively.

a) Calculate EOQ for clay and plastic pots separately.

b) Calculate the total cost of ordering and carrying pot in a year for each type of pot.

c) Jerald recently figured out that there is a new ceramic coated thin clay pots from $25 in the market. He estimated the monthly carrying costs per ceramic pot to be 20%. How much Jerald will save if he starts using new ceramic pots for both clay and plastic pots?