Question 3 (6 marks) Henry Company established a store in Mongkok, Kowloon where people enjoy drinking...

 

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Question 3 (6 marks) Henry Company established a store in Mongkok, Kowloon where people enjoy drinking Chinese tea. Henry Company estimates that the annual sale of Chinese tea will be 20,250 packs. (Each pack consists of 100 Chinese tea bags.) The cost of each pack of Chinese tea is $5. Henry Company has determined that the cost of placing a purchase order of Chinese tea packs is $20 per order. The cost to carry one pack of Chinese tea for 1 year is $1. The average lead time for a purchase order is 21 days. The supplier is reluctant to make frequent deliveries, which has forced Henry Company to place large orders to avoid any disruption in supply. Since Henry Company is aware that excess inventory on hand will increase carrying costs, it wants to determine the economic order quantity (EOQ) for the Chinese tea packs. The average daily sale and the maximum daily sale of the Chinese tea packs is 56 units and 112 units, respectively. Required: a. Compute the economic order quantity (EOQ) that will optimally balance Henry Company's ordering costs and holding costs. Also compute the relevant annual total inventory costs if the EOQ model is adopted. (4 marks) b. Compute the safety inventory and the reorder point, taking into account the safety inventory. (2 marks) Show ALL workings. Question 3 (6 marks) Henry Company established a store in Mongkok, Kowloon where people enjoy drinking Chinese tea. Henry Company estimates that the annual sale of Chinese tea will be 20,250 packs. (Each pack consists of 100 Chinese tea bags.) The cost of each pack of Chinese tea is $5. Henry Company has determined that the cost of placing a purchase order of Chinese tea packs is $20 per order. The cost to carry one pack of Chinese tea for 1 year is $1. The average lead time for a purchase order is 21 days. The supplier is reluctant to make frequent deliveries, which has forced Henry Company to place large orders to avoid any disruption in supply. Since Henry Company is aware that excess inventory on hand will increase carrying costs, it wants to determine the economic order quantity (EOQ) for the Chinese tea packs. The average daily sale and the maximum daily sale of the Chinese tea packs is 56 units and 112 units, respectively. Required: a. Compute the economic order quantity (EOQ) that will optimally balance Henry Company's ordering costs and holding costs. Also compute the relevant annual total inventory costs if the EOQ model is adopted. (4 marks) b. Compute the safety inventory and the reorder point, taking into account the safety inventory. (2 marks) Show ALL workings.

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a Compute the economic order quantity Economic order quantity 2x Cost of order ... View the full answer