Garden variety flower shop uses 890 clay pots a month. the pots are purchased at $3.70 each. annual carrying costs per pot are estimated to be 50 percent of cost, and ordering costs are $30 per order. the manager has been using an order size of 1,000 flower pots.

a. what additional annual cost is the shop incurring by staying with this order size?

Additional annual cost $156.60

Explanation:

Additional annual cost of inventory is the difference between the annual cost of the Economic Order Quantity and the current order quantity of 1000

The Economic Order Quantity (EOQ) is the order quantity that minimizes the balance of holding cost and ordering cost. At the EOQ, the holding cost is exactly the same as the ordering cost.

It is calculated as follows:

EOQ = √ (2 * Co D) / Ch)

EOQ = √ (2*30 * 890 * 12) / (50% * 3.70) = 588.53 units

Annual Inventory cost of EOQ

Ordering cost = (890 * 12 / 588.53) * 30=544.3987509

Carrying cost = 588.53 / 2 * 3.70 * 50% = 544.3987509

Annual Inventory cost = 544.39 + 544.39 = $1,088.79

Annual inventory cost of current order size

Ordering cost = (890 * 12/1000) * 30 = 320.4

Carrying cost = 1000 / 2 * 3.70 * 50% = 925

Annual inventory cost = 320.4 + 925 = $1,245.4

Additional annual cost=$1,245.4 - $1,088.79 = $156.60

Additional annual cost $156.60

The answer is 231

Explanation:

Solution

Given that:

The Number of clay pots per month = 890

The Price of each pot = $3.70

The annual carrying cost = 50% of cost = 1.85

The Ordering cost = $30

The order size=1000

Now,

EOQ = √ 2 * demand * ordering cost / carrying cost

=√2 * 890 * 30 / 1.85

=231