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Question - Sweet Tooth Pastry Place sells a wide variety of pastries. Their main pastry product is birthday cakes. The company's standard birthday cake sells for $5,000 each. The birthday cakes include a margin of 20% each. Monthly demand for cake is 50 units. The financial controller wants to know the optimal order quantity. The entity's current policy is to purchase material every two months. The company assigns an employee to place all orders. The employee is paid at a rate of $250 per hour. Each order takes five hours. While, on the other hand, the cost of holding each unit of inventory is $12. The controller was advised by the finance manager that a 3% discount would be given if Sweet Tooth doubles its current lot size. On the other hand, a 5% discount will be granted if Sweet Tooth triples its current lot size.
Required -
a) Calculate the cost price of the cakes.
b) Calculate the Economic Order Quantity.
c) Calculate the total cost based on the Economic Order Quantity.
d) Calculate the total cost for each individual alternate order quantities (including the current policy).
e) Which order quantity is considered the optimal order quantity and why?
f) List three assumptions of the EOQ model.
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