Question 1 Economic Order Quantity (EOQ) (15 marks)

The purchasing manager Justin Case, who is Paige Turner's cousin, has a very relaxed approach to purchasing ingredients. Justin Case places orders every Friday for the same amount of ingredients. He finds that this way if he doesnt turn up to work there will still be a plentiful supply of raw materials. Stan Still has just started as Justins assistant and believes that ordering could be done more efficiently. He has devised the following table to prove his point:

	Scenario
	1	2	3	4	5
Annual Demand	122,500	122,500	122,500	122,500	122,500
Cost per purchase order	$40.00	$40.00	$40.00	$40.00	$40.00
Carrying cost per package per year	$5.00	$5.00	$5.00	$5.00	$5.00
Quantity per purchase order	900	1,400	1,800	2,100	2,700
Number of purchase orders per year
Annual ordering costs
Annual carrying costs
Total annual inventory costs

Required:

1. Using Excel finish off the table. Identify the EOQ and comment on the practicality of your results? (4 marks)
2. Prepare a graphical analysis of the EOQ decision. (3 marks)
3. Picasso Paints is about to introduce an automated ordering system for its customers. Stan estimates that Picasso Paints ordering costs will be reduced to $18 per purchase order and carrying cost will become $4.00. Calculate the new EOQ and the new annual ordering and carrying costs. (4 marks)
4. Prepare a graphical analysis of the new EOQ decision and comment on the differences. (4 Marks)