Question

purchases 40,000 boxes of ice cream cones over each 200-dav dering costs are $100 7-5 The Ethel Company period of business. C
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Answer #1

Solution:

a. Economic order quantity (EOQ) = √2AO/ C

Here A = annual demand or production = 40,000 boxes

O = Order cost = $100

C = Carrying costs =$2 per box

thus, EOQ = √2×40,000×$100/ $2 = 2,000 boxes

b. Optimal number of orders to be placed = 40,000/2,000= 20

C. Total inventory cost associated with EOQ = √2AOC

= √2×40,000×$100×$2 = $4,000

d. Reorder Point = (Average daily usage × Lead time ) + safety stock = {(40,000/200)×2} + 500 = 900 units

e. Evaluation of cash discount offer :

Total cost at Order size of 3,000 boxes = C + O - cash discount =(3,000/2)×$2 + (40,000/3,000)×$100 - 3,000×0.02

= 1,500 + (13orders×$100) - 60 = $4,240

The Eathel Company should not increase its order size since total cost at EOQ level is lower than it would be at new order size.

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