Question

Garden Variety Flower Shop uses 750 clay pots a month. The pots are purchased at $2 each. Annual carrying cost per pot are estimated to be 30 percent of the cost and ordering costs are $20 per order. The manager has been using an order size of 1500 flower pots.
a. What additional annual cost is the shop incurring by staying with this order size?

b. Other than cost savings, what benefit would using the optimal order quantity yield?

Answer 1

Answer:

a. What additional annual cost is $2250

b. Other Benefits of optimal order quantity - Reduces Obsolescence of Stock

Explanation:

The additional annual cost that Garden Variety Flower is the Holding or Carrying Cost of Inventory

Holding or Carrying Cost = Order Quantity/ 2 × Carrying Cost per Unit

Holding Cost at the Usage Level = ( 750/2) × ($2×30%) = $225

Holding Cost at Current Usage = ( 1500/2) × ($2×30%) = $450

Additional Holding Cost                                                   = $2250