Question

Groundz Coffee Shop uses 4 pounds of a specialty tea weekly; each pound costs $16. Carrying costs are $52. It costs the firm $8 to prepare an order. Assume the basic EOQ model. Assume 52 weeks per year. a. How many pounds should Groundz order at a time? b. What is total annual cost (including item cost) of managing the shop? $ c. In pursuing lowest annual total cost, how many orders should Groundz place annually? d. How many days will there be between orders (assume 312 operating days) if Groundz practices EOQ behavior?

Answer 1

Answer:

a. 8 pounds

b. $3,744

c. 26 orders

d. 12 days

Explanation:

a. 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,

Annual demand = 52 weeks × 4 pounds = 208 pounds

And, the other items values would remain the same

= $\sqrt{\frac{2\times \text{208}\times \text{\ 8}}{\text{\ 52}}}$

= 8 pounds

b. For computing the total annual cost, the following calculations need to be done

The number of orders would be equal to

= Annual demand ÷ economic order quantity

= $208 ÷ 8 pounds

= 26 orders

The average inventory would equal to

= Economic order quantity ÷ 2

= 8 pounds ÷ 2

= 4 pounds

The total cost would be

= Item cost + ordering cost + carrying cost

where,

Item cost = 208 × $16 = $3,328

Ordering cost = Number of orders × ordering cost per order

= 26 orders × $8

= $208

Carrying cost = average inventory × carrying cost per unit

= 4 pounds × $52

= $208

So, the total would be  

= $3,328 + $208 + $208

= $3,744

c. 26 orders explained in part b

d. The number of days between the orders

= 312 operating days ÷ 26 orders

= 12 days