Garden Variety Flower Shop uses 610 clay pots a month. The pots are purchased at $2.70 each. Annual carrying costs per pot are estimated to be 50 percent of cost, and ordering costs are $30 per order. The manager has been using an order size of 1,000 flower pots. Required:
a. What additional annual cost is the shop incurring by staying with this order size?
b. Other than cost savings, what benefit would using the optimal order quantity yield (relative to the order size of 1,000)?

a. $124.59

b. 57%

Explanation:

Monthly demand = 610

Annual demand (D) = 610 x 12 = 7,320

Cost (C) = $2.70 each

Annual carrying costs (Cc) = 50% of cost = 50% × $2.70 = $1.35

Ordering costs (Co) = $30

Current order quantity (Q1) = 1,000

a. What additional annual cost is the shop incurring by staying with this order size?

Current cost will be:

= [(1000 / 2) x $1.35] + [(7320 / 1000) x $30]

= (500 × $1.35) + (7.32 × $30)

= $675 + $219.60

= $894.60

Then, the optimal order quantity will be calculated as:

Q = ✓[(2 x D x Co) / Cc]

Q = ✓[(2 x 7320 x 30) / 1.35]

Q = 570.38

Q = 570

Therefore, the optimal order quantity is 570 units.

New cost will be:

= [(570 / 2) x $1.35] + [(7320 / 570) x $30]

= $384.75 + $385.26

New cost = $770.01

Additional annual cost will then be:

= $894.6 - $770.01

= $124.59

b. Other than cost savings, what benefit would using the optimal order quantity yield (relative to the order size of 1,000

Storage space will be:

= (570 / 1000) x 100

= 57%

Therefore, about 57% of the storage space would be needed.

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