Question
Wheat Co. is the main supplier of wheat breads to customers in Kingston. The company currently makes 18,750,000 units of wheat bread annually which uses
Wheat Co. is the main supplier of wheat breads to customers in Kingston. The company currently makes 18,750,000 units of wheat bread annually which uses baking flour. Production takes place evenly during the year. Each baked product uses 0.0004 kilogram of baking flour and the baking flour is used evenly during the period. Wheat Co. sells the wheat bread for $42.50 each which includes a mark-up of 25%. However, the operations manager believes that profits could increase if the company moves away from the current policy. Currently, the company makes ten (10) equal orders per year and orders are made instantaneously. It was agreed with a new supplier that the cost per kilogram would vary based on the quantity purchased. A 4% discount will be given if the current order size is doubled, a 6% discount for orders three times the current order size and an 8% discount if orders are four times the current order size. No discounts are given for orders less than the current lot size. It was further highlighted that the entity designates an employee to place all orders; the employee is paid $30 per hour and each order takes on average four hours. The cost of storing is to be $1.60 per unit of average stock plus an opportunity cost. Furthermore, the opportunity cost of holding one kilogram is expected by be 20% of the current purchase cost of the baking flour. The current purchase price of the baking flour is 50% of the cost of each wheat bread. Required: a. Calculate the EOQ based on the formula. (3 marks) b. Calculate the total cost based on the EOQ. (4 marks) c. Calculate the total cost for each alternate order including the current policy. (16 marks) d. Which order quantity is considered the optimal order quantity and why?
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