The Economic Order Quantity for Pide Inc.

What is the current order size for Policy A and what is the total cost of operating inventory?

a) Currently, Pide places an order every month (call this policy A).

Answer:

The current order size for policy A is 48 bags, and the total cost of operating inventory is $30,120.

In order to determine the current order size for Policy A and the total cost of operating inventory for Pide Inc., we need to understand the concept of Economic Order Quantity (EOQ) and the associated costs involved.

The EOQ formula is given by: EOQ = sqrt(2SD/H), where S is the setup cost per order, D is the annual demand, and H is the inventory holding cost rate.

In this case, the setup cost per order for Pide Inc. is $2,000, the annual demand is 60 bags per month * 12 months = 720 bags, and the inventory holding cost rate is 10% or 0.1.

By plugging in these values into the EOQ formula, we can calculate the current order size for Policy A: EOQ = sqrt((2 * $2,000 * 720) / 0.1) = 48 bags.

The total cost of operating inventory is the sum of the annual ordering cost and the annual carrying cost. The annual ordering cost is given by: (D/EOQ) * S, and the annual carrying cost is given by: (EOQ/2) * H * P, where P is the price per bag.

After calculating, we find that the annual ordering cost is $30,000 and the annual carrying cost is $120. Therefore, the total cost of operating inventory for Pide Inc. under Policy A is $30,000 + $120 = $30,120.