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The document summarizes the calculations to determine the optimal order quantity for flower pots ordered by a garden shop each month. It shows the shop currently orders 1,500 pots per order. The optimal order quantity is calculated to be 774 pots, which results in a lower total annual cost of $464 compared to the current policy of $570. It also provides additional analysis on reorder points and costs if incorrect assumptions are used.

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3K views2 pages

Elect 2

The document summarizes the calculations to determine the optimal order quantity for flower pots ordered by a garden shop each month. It shows the shop currently orders 1,500 pots per order. The optimal order quantity is calculated to be 774 pots, which results in a lower total annual cost of $464 compared to the current policy of $570. It also provides additional analysis on reorder points and costs if incorrect assumptions are used.

Uploaded by

trishamae
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1. Garden Variety Flower shop uses 750 clay pots a month.

The pots are


purchased at $2each. Annual carrying costs per pot are estimated to be 30% of
cost. Ordering costsare $20 per order. Manager has been using an order size of
1,500 flower pots.

GIVEN:
D = 750 pots/mo. x 12 mo./yr. = 9,000 pots/yr.
Price = $2/pot S = $20 P = $50
H = ($2)(.30) = $.60/unit/year

a. What is the annual total cost incurred by the shop due to current ordering
policy?
1,500 9,000
= (. 6) + (20)
2 1,500
= 450 + 120 = $

b. What is the cost minimizing ordering quantity?

= 2

= 2(9,000)20
.60
= 774.60

c. What is the annual total cost for the ordering policy in b)

774.6 9,000
= (. 6) + (20)
2 774.6
= 232.35 + 232.36 = 464.71/

d. Compare and comment on the answers you got for a) and c)


Less cost, less inventory
e. How many months should be between two consecutive orders?
775/750=1.03

f. Assume the lead time is two weeks and the shop works 4 weeks per month. If
the company wishes to carry no safety stock what is the reorder point?
d=750/4=187.5/week
LT=2weeks
ROP=187.5*2=375

g. If the manager mistakenly computed the inventory holding cost as 40


percent of cost of a pot, what would be the economic order quantity based on
the wrong holding cost? (Round your answer to the nearest integer.)

H = 0.4*2=0.8671
2
=

2(9,000)20
= = 671
. 80

h. Suppose the store uses the wrong order quantity calculated in part f).
However, the actual carrying cost is 30 percent of cost of a pot. What total
annual cost does the store incur when using the wrong order quantity? (Round
your answer to the nearest integer.)

671 9,000
= (. 60) + (20) = 470/
2 671

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