ICE Task #1 – LU1 (EOQ)

Paris-in-Durban (Pty) Ltd (“Paris-in-Durban”) is a local bakery that bakes a variety of French
breads and pastries. Located in Umhlanga, the bakery was started by a French couple in 2015
and over the last few years has grown in popularity amongst locals.

DeliciousDoughs (Pty) Ltd (“DelisciousDoughs”) is the sole supplier of dough to Paris-in-

Durban, the main ingredient used for breads and pastries. Information pertaining to the usage
and costs of dough is provided below.

Annual baking usage/consumption 42 000kg

Ordering costs R80 per order
Purchase price R15 per kg
Required rate of return per annum 16%
Safety stock level 210kg

In addition to the required rate of return, holding costs amount to R1.80 per kg per annum,
and insurance of 7% of the cost per kilogram per year.

Paris-in-Durban currently applies the economic order quantity (EOQ) model. However,
DeliciousDoughs have offered to sell the dough at R14 per kilogram, should Paris-in-Durban
decide to place only 24 orders per year. Should Paris-in-Durban accept the special offer,
additional storage space at a cost of R400 per month will be required.

Required:
Determine whether the EOQ model should be applied or whether the special price per
kilogram of dough should be accepted. Please make use of an Excel spreadsheet to show your
calculations and include formulas. (20 marks)

[Unisa adapted]