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Justifying Order Size for Glass Jars

The company uses 4,000 jar lot sizes for its monthly orders of 27,000 jars, incurring $1.33 more per month than the optimal order quantity. To justify ordering every other day, the ordering cost would need to be $40.11 or less. If the ordering cost was reduced to $50, the manager could justify an order size of 2,050 jars, which would allow ordering every other day.

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Atashi Chakma
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1K views1 page

Justifying Order Size for Glass Jars

The company uses 4,000 jar lot sizes for its monthly orders of 27,000 jars, incurring $1.33 more per month than the optimal order quantity. To justify ordering every other day, the ordering cost would need to be $40.11 or less. If the ordering cost was reduced to $50, the manager could justify an order size of 2,050 jars, which would allow ordering every other day.

Uploaded by

Atashi Chakma
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
  • Cost Analysis and EOQ Calculation

A food processor uses approximately 27,000 glass jars a month for its fruit juice product.

Because
of storage limitations, a lot size of 4,000 jars has been used. Monthly holding cost is 18 cents per
jar, and reordering cost is $60 per order. The company operates an average of 20 days a month.
a. What penalty is the company incurring by its present order size?
b. The manager would prefer ordering 10 times each month but would have to justify any change
in order size. One possibility is to simplify order processing to reduce the ordering cost. What
ordering cost would enable the manager to justify ordering every other day?
c. Suppose that after investigating ordering cost, the manager is able to reduce it to $50. How
else could the manager justify using an order size that would be consistent with ordering every
other day?

a. EOQ = SQRT(2 x 27000x60/0.18) = 4243


Cost = DS/Q + HQ/2 = 27000x60/4243 + 0.18*4243/2 =$763.67
Cost at q =4000, Cost = 27000X60/4000 + 0.18 x 4000/2 = $765
Monthly 765 – 763.67 = $1.33 more costs are there for the current order size.

b. If 19 time ordering ia there per month, then Q = 27000/10 = 2700,


Then inventory cost = 27000x60/2700 + 0.18 x2700/2 = $843
As the cost is higher than cost of present ordering size or EOQ, so it is not justifiable in
the context of cost.
For every other day ordering size (Q) would be = 27000/15 = 1800
SO to justify this ordering cost be equal or less than the cost at EOQ
763.67 = 27000 x S/1800 + 0.18 x 1800/2
S = $40.11

c. Cost for order size Q = 27000 x 50/Q + 0.18 x Q/2 = 843


0.09Q2 – 843Q + 1350000 =
Q = (843 ±SQRT(8432 – 4 x 1350000 X0.09))/2x0.09
= 843± 474/0.18 = 3476
Q= 2050

A food processor uses approximately 27,000 glass jars a month for its fruit juice product. Because of storage limitations, a

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