Fresco Inc. manufactures sour pops annually which requires 0.4 kilograms of raw material. The company produces and sells 1,600, 000 sour pops annually. The cost to place a single order is $60 per hour which takes four (4) hours on average. The annual carrying cost of inventory is 4% per annum and currently, the company orders twenty (20) times per year. A major supplier has offered some incentives for bulk purchases and as the junior cost accountant you were asked to provide your professional opinion on the optimal order size. A 3% discount would be given if the entity doubles its current lot size. A further 2% would be given if the entity increased its order by two and a half times the current lot size. The material is currently bought from its supplier for $120 per kilogram. Required: (a) Calculate the Economic Order Quantity (EOQ). (b) Calculate the total cost based on the EOQ. (c) Calculate the total cost for each alternate order quantities, including the current policy. (d) What is the optimal order quantity and why?
Fresco Inc. manufactures sour pops annually which requires 0.4 kilograms of raw material. The company produces and sells 1,600, 000 sour pops annually. The cost to place a single order is $60 per hour which takes four (4) hours on average. The annual carrying cost of inventory is 4% per annum and currently, the company orders twenty (20) times per year. A major supplier has offered some incentives for bulk purchases and as the junior cost accountant you were asked to provide your professional opinion on the optimal order size. A 3% discount would be given if the entity doubles its current lot size. A further 2% would be given if the entity increased its order by two and a half times the current lot size. The material is currently bought from its supplier for $120 per kilogram. Required: (a) Calculate the Economic Order Quantity (EOQ). (b) Calculate the total cost based on the EOQ. (c) Calculate the total cost for each alternate order quantities, including the current policy. (d) What is the optimal order quantity and why?
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