Question 3 about EOQ and price break (Total 20 marks)

Louis Wan operates a food shop located in Wan Chai with 50 m²floor area. He recently expanded his food range to include trendy food of doughnuts with non-traditional fillings. His estimation of the annual demand is 9,000 doughnuts. He has contacted a wholesaler who can supply frozen doughnuts at $5 each. The delivery lead time is 3 working days. For Louis, the holding cost of each doughnut per year is 10% of the wholesale unit price, and the ordering cost is $35 per order. There are 250 working days per year. All the assumptions of Economic Order Quantity (EOQ) model are satisfied.

Show the units and steps of calculation when you answer the following questions. Round your final answers to the nearest integer (i.e. 0 decimal place)

a) What is the EOQ if Louis wants to purchase doughnuts from this wholesaler? (2 marks)

b) Based on the EOQ in (a), what is the total annual inventory cost (including the annual purchase cost of doughnuts)? (2 marks)

c) Based on the EOQ in (a), what is the reorder point (ROP)? (2 marks)

d) Based on the EOQ in (a), what is the time between orders (in working days)? (2 marks)

Recently another frozen doughnut supplier approached Louis and presented him two offers:

(1) when 1,150 or more doughnuts are purchased per order, the unit price is $4.60, and

(2) when 1,250 or more doughnuts are purchased per order, the unit price is $4.40.