Fresco Inc. manufactures sour pops annually which requires $0\mathrm{.}4$ kilograms of raw material. The

company produces and sells $1,600,000$ sour pops annually. The cost to place a single order is $$60$

per hour which takes four $(4)$ hours on average. The annual carrying cost of inventory is $4\%$ per

annum and currently, the company orders twenty $(20)$ times per year.

A major supplier has offered some incentives for bulk purchases and as the junior cost accountant

you were asked to provide your professional opinion on the optimal order size. A $3\%$ discount

would be given if the entity doubles its current lot size. A further $2\%$ would be given if the entity

increased its order by two and a half times the current lot size. The material is currently bought

from its supplier for $$120$ per kilogram.

Required:

$($a$)$ Calculate the Economic Order Quantity $($EOQ$).$

$($b$)$ Calculate the total cost based on the EOQ.

$($c$)$ Calculate the total cost for each alternate order quantities, including the current policy.

$($d$)$ What is the optimal order quantity and why?

Answer rating: 100% (QA)

a To calculate the Economic Order Quantity EOQ we can use the following formula EOQ sqrt2 D S H Where D Annual demand number of sour pops produced and ... View the full answer