Opitmal Q and Total Cost
Rise and Shine has been buying cereal directly from the manufacturer for $32 per case. The company’s annual demand for cereal is 275,000 cases and the company believes that the demand is constant for each of the 250 days per year that it is open for business. Average lead time from the supplier for new orders is a constant 5 working days. The purchasing agent at Rise and Shine estimates the annual inventory carrying cost is $3 per case and it costs approximately $55 to prepare, send, and receive an order. You are expected to show your calculations to each part of this question in the test document, not in an Excel file. Round calculations to at least 2 decimal places.
a)Based on the economic order quantity, how many cases of cereal should Rise and Shine order each time it places an order? (3)
D= 275000
S= $55
H=$ 3
=
EOQ = 3175.42
b)What would the average annual inventory be based on the answer to (a)? (2)
= 1587.71
c)What is the reorder point based on the answer to (a)? (2)
Reorder Point = Daily Demand * Lead Time
= 1100 Lead Time = 5
1100*5= 5500 cases
d)Rise and Shine discovered if it orders certain quantities each time it places an order, they can obtain a specific price break per case from the supplier (see table below). Identify the optimal order quantity within each price point quantity range and calculate the total annual cost associated with each price point. Show your calculations. Transfer your final answers into a table like the one below. (6)
Quantity
Price
Optimal Q
Total Cost
0–1,999 cases
$32.00
2,000-3,999 cases
$30.00
4,000+ cases
$28.00
e)What order quantity should Rise and Shine place based on this information? Explain your answer. (2)
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