Reference no: EM133099630

EOQ QUESTION - Butterflakes Bakery Limited is the main supplier of patties to customers in Montego Bay. The company currently makes 50,000,000 patties annually which uses baking flour. Production takes place evenly during the year. Each patty uses 0.0002 kilograms of baking flour and the baking flour is used evenly during the period. Butterflakes sells beef patties for $240 each which includes a mark-up of 20%. However, the operations manager believes that profits could increase if the company departs from the current policy. Currently, the company makes five equal orders per year. That is, the entity orders five times annually and orders are made instantaneously.

However, the chief executive officer (CEO) does not believe that the current order quantity is the optimal order quantity. As a result, he spent $20,000.00 last month to ascertain whether the optimal order quantity is different from the current policy. Moreover, he held a discussion with the main suppliers of baking flour and was told that the current purchase can be reduced if the company orders more than the current lot size.

Further discussions indicated that the cost per kilogram would vary based on the quantity to be bought. A 2.5% discount will be given for orders 500 kilograms above the current lot size, 5 % discount for orders of 1,000 kilograms above the current lot size, 7.5% discount if the current lot size is doubled and a 10% discount for orders two and a half 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 of less than the current lot size.

It was further highlighted that the entity designates an employee to place all orders; the employee is paid $125 per hour and each order takes on average six hours. Additionally, a transportation charge of $250 is associated with each order. The cost of storing is to be $10 per unit of average stock plus the opportunity cost below. Furthermore, the opportunity cost of holding one kilogram is expected to be 10% of the current purchase cost. The current purchase price is 50% of the cost of each patty.

Required -

1. Calculate the EOQ based on the formula.

2. Calculate the total cost based on the EOQ.

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

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