Question

Restaurant A uses 60 bags of potatoes each month. The potatoes are purchased from a supplier for a price of $80 per bag and an ordering cost of $20 per order. Restaurant A’s annual inventory holding cost percentage is 40%. If Restaurant A’s demand for the potatoes is decreased by 10%, what will be the change in its economic order quantity?
A. Decreases from 8.7 bags to 8.2 bags

B. Remains the same

C. Increases from 28.5 to 30 bags

D. Decreases from 30 to 28.5 bags

Answer 1

Answer:

D. Decreases from 30 to 28.5 bags

Explanation:

The computation of the economic order quantity is shown below:

= $\sqrt{\frac{2\times \text{Annual demand}\times \text{Ordering cost}}{\text{Carrying cost}}}$

where,

Carrying cost is $80 × 40% = $32

Annual demand = 60 bags × 12 months = 720 bag

And, the ordering cost is $20 per order

Now put these values to the above formula  

So, the value would equal to

= $\sqrt{\frac{2\times \text{720}\times \text{\ 20}}{\text{\ 32}}}$

= 30 bags

Now the demand is decreased by 10% So, the annual demand would be

= (60 - 6) × 12 months

= 54 bags × 12 months

= 648 bags

The other things will remain the same  

Now put these values to the above formula  

So, the value would equal to

= $\sqrt{\frac{2\times \text{648}\times \text{\ 20}}{\text{\ 32}}}$

= 28.46 bags