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A company is in the art of making waist beads. It requires 0.02 kilograms of coloured beads and the company produces and sells 800,000 units of waist beads annually. The cost to place a single order is $30 per hour and the annual carrying cost inventory is 2 ½% of the cost of the coloured beads per annum. The normal time to place an individual order is four (4) hours. Currently, the company orders eight (8) times per year.
The main supplier of the coloured beads advised the financial controller that a 5% discount would be given if the entity doubles its current lot size. He also informed that a further 5% would be given if the entity increased its order by 4,000 kilograms above the current lot size. The material is currently bought from its supplier for $60 per kilogram.
Required:
Question 1: Calculate the Economic Order Quantity (EOQ).
Question 2: Calculate the total cost based on the EOQ.
Question 3: Calculate the total cost for each individual alternate order quantities, including the current policy.
Question 4: What is the optimal order quantity and why?
Question 5: State three (3) assumptions of EOQ.
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