Tasty Bakery (TB) produces and then sells 2.6 million bread annually. The company purchases wheat in the multiple of 100 kg to produce bread. Ordering cost, which includes grain elevator removal charge of Rs 3,500 is Rs 5,000 per order. Annual carrying costs are 2 percent of the purchase price of Rs 50 per kg. The company maintains a safety stock of 200,000 kg. The delivery time is 6 weeks.a. What is the economic order quantity?b. What is the total inventory costs?c. What is the reorder level?d. Suppose the supplier offers 1 percent quantity discount if TB places 4 times order in a year. Should the offer be accepted?
Question
Tasty Bakery (TB) produces and then sells 2.6 million bread annually. The company purchases wheat in the multiple of 100 kg to produce bread. Ordering cost, which includes grain elevator removal charge of Rs 3,500 is Rs 5,000 per order. Annual carrying costs are 2 percent of the purchase price of Rs 50 per kg. The company maintains a safety stock of 200,000 kg. The delivery time is 6 weeks.a. What is the economic order quantity?b. What is the total inventory costs?c. What is the reorder level?d. Suppose the supplier offers 1 percent quantity discount if TB places 4 times order in a year. Should the offer be accepted?
Solution
a. Economic Order Quantity (EOQ):
The EOQ formula is: EOQ = sqrt((2DS)/H)
Where: D = Demand per year = 2.6 million breads S = Ordering cost per order = Rs 5,000 H = Holding cost per unit per year = 2% of Rs 50 = Rs 1
However, we don't know how much wheat is required to produce one bread. Let's assume it's 'x' kg. Therefore, the demand in kg of wheat is 2.6 million * x.
So, the EOQ = sqrt((2 * 2.6 million * x * Rs 5,000) / Rs 1)
b. Total Inventory Costs:
Total Inventory Costs = Ordering Costs + Holding Costs
Ordering Costs = (D/EOQ) * S Holding Costs = (EOQ/2) * H
Substitute the values and calculate.
c. Reorder Level:
Reorder Level = Demand during lead time + Safety Stock
Demand during lead time = (Demand per year / 52 weeks) * Lead time in weeks Safety Stock = 200,000 kg
Substitute the values and calculate.
d. Quantity Discount:
If TB places 4 orders in a year, the order size would be (2.6 million * x) / 4. If this order size is greater than or equal to the EOQ calculated in part a, and the total cost with the discount is less than the total inventory cost calculated in part b, then TB should accept the offer. Otherwise, it should not.
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