The IBP Grocery Orders Most of Its Items in Lot

question 44

Essay

The IBP Grocery orders most of its items in lot sizes of 10 units. Average annual demand per side of beef is 720 units per year. Ordering costs are $25 per order with an average purchasing price of $100. Annual inventory carrying costs are estimated to be 40% of the unit cost.
Required:
a.Determine the economic order quantity.
b.Determine the annual cost savings if the shop changes from an order size of 10 units to the economic order quantity.
c.Since the shelf life is limited, the IBP Grocery must keep the inventory moving. Assuming a 360-day year, determine the optimal lot size under each of the following: (1) a 20-day shelf life and (2) a 10-day shelf life.

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Definitions:

Variable Overhead Rate

A rate that changes with the level of activity or production volume, applied to variable overhead costs.

Lubricants Variance

A difference between the expected and actual cost of lubricants used in a manufacturing or operational process.

Variable Overhead

Variable overhead consists of indirect production costs that vary with the level of output, such as utilities for manufacturing facilities.

Indirect Labor

The labor of employees who are not directly involved in the production process but support production through tasks such as maintenance and supervision.