Assume this is a comprehensive exam question on Operations Management

Answer the two questions below, as based on the case facts.

1. What information do you still need (if any), in order to apply the Economic Order Quantity Formula that is
commonly taught in textbooks?

a) What is the EOQ formula?

b) What new information do you need, if any?

c) Based on the facts given, give the values of the variables of the EOQ formula?

d) What is your Economic Order Quantity?

2. What are the factors existing in the real world that will make your EOQ highly inaccurate?

Rice Trading Case

A friend has a rice mill located in the municipality of St. Bernard in Southern Leyte. One day, he mentioned that he
is willing to supply you with white, black, red and brown rice. All of them are well-milled and at similar prices. Due
to high perishability, the black, red and brown rice are to be vacuumed packed and 2, 5 and 10 kilograms.

Upon checking the location of in Google Map, you found out that St. Bernard is almost 2 hours from the
municipality of Hilongos, Southern Leyte (86 km). The sea port of Hilongos is the jump off point for ships coming
to Cebu City.

A sack of rice is 50 kgs. 400 sacks is 20 tons. Your research showed that a 10-wheeler truck can carry load of 15 to
20 tons. The truck costs between 1.75 to 2.2 million, the latter is of the latest model, second hand. The estimated
cost of fuel to transport using a fully loaded 10-wheeler truck is 4 liters per liter of diesel. Cost to ship the fully
loaded truck from Hilongos to Cebu is P30 per 50 kgs sack of rice to the warehouse of the customer which is
located within 10 kilometers from the pier of Cebu.

The general idea is to just find a customer to deliver the rice directly to him from the rice mill. But the idea of
retailing the non-white rice is also attractive. So, if only to consider the white rice, such direct delivery to customer
may be a good idea. Otherwise, rental of a warehouse is P180 per sqm for areas less than 200 sqm. For greater
than 200 sqm, the leasing rate is about P140 per sqm. Warehouses in Cebu City can be located up to 10 kilometers
from the port area. For the retailing of the rice, a multi cab can be purchased at P195,000, and the cost of fuel is
about 6 kilometers per liter gasoline at maximum 20 sack capacity.

To give an example of the price of rice given by the rice miller – during the time when Cebu public markets are
selling at P53-55 per kilo of well milled rice, the rice miller was willing to give you at a uniform price of P40 per kg.
Due to the sensitivity of the non-white rice to deterioration, an additional charge of P5 per kgs will be included.
The miller will take care of the bagging of all kinds of rice.

Based on the above, 1) how much should the rice miller be selling his rice if the average price of white rice in Cebu
is P50? 2) A quick check on prices in Rustan’s supermarket revealed the prices of brown, red and black rice in
Cebu are retailed at about P60, P80 and P90 per kg. How much should you market these types of rice?

You also would like to consider an owner of supermarket, who may be willing to buy your rice directly from the
rice mill (door to door delivery). His estimated quantity is 100 sacks of white rice per week.