Reference no: EM132757688

Question - Prestige Donuts Limited is the main supplier of a variety of baked products to customers in St. Catherine. The company currently makes 75,000,000 units of a variety of baked products annually which uses baking flour. Production takes place evenly during the year. Each baked product uses 0.0004 kilogram of baking flour and the baking flour is used evenly during the period. Prestige sells the baked products for $170 each which includes a mark-up of 25%. However, the operations manager believes that profits could increase if the company departs from the current policy. Currently, the company makes twelve (12) equal orders per year. That is, the entity orders 12 times annually and orders are made instantaneously.

Discussions with the CEO and external suppliers indicated that the cost per kilogram would vary based on the quantity purchased. A 5% discount will be given for orders doubling the current lot size, 7% discount for orders tripling the current lot size, 10% discount if the lot size is four times the current lot size. It is also expected that orders will be made instantaneously and there will be no lead time between ordering and receiving the raw material. No discounts are given for orders less than the current lot size.

It was further highlighted that the entity designates an employee to place all orders; the employee is paid $120 per hour and each order takes on average four hours. The cost of storing is to be $6.40 per unit of average stock plus an opportunity cost. Furthermore, the opportunity cost of holding one kilogram is expected by be 20% of the current purchase cost of the baking flour. The current purchase price of the baking flour is 50% of the cost of each baked product.

Required -

a. Calculate the EOQ based on the formula.

b. Calculate the total cost based on the EOQ.

c. Calculate the total cost for each alternate order including the current policy.

d. Which order quantity is considered the optimal order quantity and why?