Question
A bakery buys flour from its supplier at a price of $1/lb and uses it to produce a variety of baked goods. The inventory holding
A bakery buys flour from its supplier at a price of $1/lb and uses it to produce a variety of baked goods. The inventory holding cost is 20% of the price of the flour per year. Each order placed with the supplier costs the bakery $10 in fixed overhead costs, irrespective of the order amount. Suppose the bakery uses flour at a constant rate of 50 lbs/week and there are 50 weeks in a year.
1) How much flour (in lbs) should the bakery purchase in each order to minimize the total ordering and holding cost in a year? If your answer is not an integer, provide at least three decimal places, e.g., 7.500.
2) If the bakery orders the amount you calculated in Question 1, how many orders should they place in a year? If your answer is not an integer, provide at least three decimal places, e.g., 7.500.
3) If the bakery orders the amount you calculated in Question 1, what is the total yearly ordering and inventory holding cost?If your answer is not an integer, provide at least three decimal places, e.g., 7.500.
4) The supplier is running a special offer: if the bakery purchases 1000 lbs in an order, they get $10 cashback. What is the bakery's NET yearly ordering and inventory holding cost if they avail this offer?If your answer is not an integer, provide at least three decimal places, e.g., 7.500.
Hint: You need to calculate the total yearly ordering and inventory holding cost and the number of orders placed in a year under this new order quantity. The NET cost = the total cost - total cashback received in a year.
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