Reference no: EM132234352

Sarah’s Organic Soap Company makes four kinds of organic liquid soap- “regular”, “lavender”, “citrus” and “tea tree”. Demand for the four scents are 150, 120, 75 and 50 kgs per hour respectively. Sarah’s production process can produce any soap at the rate of 450 kgs per hour but 1.5 hours are needed to switch between scents.

During those switchover times, the process doesn’t produce any soap. Sarah wants to choose a production schedule that (i) cycles repeatedly through the four scents, (ii) meets the required demand and (iii) minimizes the amount of inventory held.

a. How many kgs of “regular” should Sarah produce before switching over to another scent?

b. Sarah needs to purchase organic Palm oil to make her soaps. She needs 1,000 kgs of Palm oil per day on average. The supplier delivers immediately and charges a $60 delivery fee per order (which is independent of the order size) and $4.75 per kg. Sarah’s annual holding cost is 25%. Assume 52 weeks per year and 5 days per week. If Sarah wants to minimize inventory holding and ordering costs, how much Palm oil should she purchase with each order (in kgs)?

c. If Sarah purchased the EOQ per order, what would be her average inventory holding and delivery fees per day (in $s)? (Note, do NOT include her purchasing costs per day.)

d. Sarah’s supplier is willing to sell her Palm oil at a 5% discount if she purchases 10,000 kgs at a time. If she were to purchase 10000 kgs per order, what would be her average inventory holding and delivery fees per day (in $s)? (Note, do NOT include her purchasing costs per day.)

e. Should Sarah order 10,000 units at the 5% discount or order the original EOQ (i.e. without the discount)? (Hint: Compare the total cost, that is, the sum of purchase cost, delivery cost, and average holding cost in each case)