After calculating the economic order quantity

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Reference no: EM132202304

You are the owner of a small sand and gravel reselling business in Maine. One of the products you have is a special, high-quality gravel. You buy the gravel in larger orders. From the sales department you collect the yearly demand 5500 pounds. Your colleagues from procurement let you know that you pay $210 per order and that you have a yearly interest rate of 7.7 %. You pay $16 per pound of gravel. That is, your holding cost per pound and year are ‘interest rate x price per pound’.

Calculate the Economic Order Quantity.

Round to two decimal digits.

How many times do you order per year?

Round your answer down to the nearest integer value.

After calculating the economic order quantity, you start to worry if the estimates for the fixed cost and for the holding cost are accurate. You decide to evaluate the total relevant cost (the sum of ordering and holding cost) for a different estimate for the fixed cost and for the holding cost.

Calculate the total relevant cost with the information given in Question 1 but with a 20% higher fixed cost of $252 per order.

Round to the nearest integer value.

Calculate the total relevant cost with the information given in Question 1 but with a 20% higher annual interest rate 9.24 %.

Round to the nearest integer value.

In past years your order quantity differed from the one you calculated in Question 1. For example, in last year (in 2017) you chose a 30% higher order quantity than the one given in Question 1, and two years ago (in 2016) you chose a 30% lower order quantity than the one given in Question 1.

Which of the following statements are correct?

A) 30% higher order quantity in 2017 can be optimal if the fixed cost was higher or the demand was lower in 2017.

B) Assume that in any given year you have the same parameters as in Question 1. A 30% higher order quantity results in higher total relevant cost (the sum of ordering and holding cost) than a 30% lower order quantity.

C) 30% lower order quantity in 2016 can be optimal if demand and fixed cost were higher in 2016.

D) 30% higher order quantity in 2017 can be optimal if the fixed cost was higher, the interest rate was lower, and the demand was higher in 2017.

E) Assuming that in any given year you have the same parameters as in Question 1, a 30% lower order quantity results in higher total relevant cost (the sum of order and holding cost) than a 30% higher order quantity.

F) None of the above.

Reference no: EM132202304

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