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A bakery buys flour in 25-pound bags. The bakery uses 1,215 bags a year. Ordering cost is
$10 per order. Annual carrying cost is $75 per bag.

a. Determine the economic order quantity.

Answer

Economic Order Quantity (EOQ) represents the optimal order size with the lowest inventory
and shipping costs for an order for an inventory item, given the expected usage, shipping and
order costs. EOQ is the size of an order that minimizes total inventory costs.

Given:

Annual Demand, D = 1215

Order Cost, S = 10
Transport / Holding Cost, H = 75
2 DS 2 ( 1215 ) (10)
EOQ=
√
H
=
√ 75
=18
The  economic order quantity is 18 bags. 

b. What is the average number of bags on hand?

ANSWER
EOQ 18
average number of bags on hand=¿ = =9
2 2

The average number of bags on hand is 9 bags. 

c. How many orders per year will there be?

Answer

D 1215
Orderes per year= = =67.5
EOQ 18
There are 68 orders per year. 

d. Compute the total cost of ordering and carrying flour.

Answer
D Q 1215 18
TOTALCOST = ( S ) + ( H )= ( 10 ) + ( 75 ) =1350
Q 2 18 2
The total cost of ordering and carrying is $1350. 

e. If holding costs were to increase by $9 per year, how much would that affect the
minimum total annual cost?
Answer
New holding cost= 75 +9 = 84
Solve for EOQ first: 
 2 DS 2 ( 1215 ) (10)
EOQ=
√ H
=
√ 75
=18

Then the total cost: 

D Q 1215 17
TOTALCOST = ( S ) + ( H )= ( 10 ) + ( 84 )=1428.71
Q 2 17 2
1428.71- 1350 = 78. 71
 
Increasing the holding cost by $9 caused the total cost to increase by $78.71.