Problem
Diane Delbert operates a health food bakery that uses a special type of ground flour in one of its high-margin products. The bakery operates 365 days a year. Delbert finds that she seems to order either too much or too little special fl our and asks for your help. After some discussion, you find that she has no idea of when or how much to order. An examination of her records and answers to further questions reveal the following information:
Annual usage of special flour = 7,000 pounds
Average number of days delay between initiating and receiving an order = 12
Estimated cost per order = $32.00
Estimated annual cost of carrying a pound of special fl our in inventory = $0.50
Task
i. Calculate the economic order quantity for flour.
ii. Assume that Delbert desires a safety stock cushion of seven days' usage. Calculate the appropriate order point.
iii. Total annual costs of ordering and Carrying costs at EOQ.