Use this information to answer the following questions.
A bakery buys sugar in 15-pound bags.The bakery uses 5000 bags of sugar each year.Carrying costs are $20 per bag per year.Ordering costs are estimated at $5 per order.Assume that the bakery is open 250 days a year and its daily demand is estimated at 20 bags.It takes 5 days for each order of sugar to be filled.
-Refer to the information above.What is the total cost of ordering and carrying sugar?
A)$50
B)$100
C)$25
D)$1000
E)$500

Question

Quizplus · Accepted Answer

The annual ordering cost can be calculated by dividing the total demand by the number of bags per order:

5000 bags / (5000 bags / 20 bags per day) = 250 orders

The total ordering cost is then:

$5 per order x 250 orders = $1250

The annual carrying cost is calculated as the average inventory multiplied by the carrying cost per bag:

(5000 bags / 2) x $20 per bag = $50,000

Therefore, the total cost of ordering and carrying sugar is:

$1250 + $50,000 = $51,250.

The best choice(s) would be to increase the order quantity to reduce the number of orders per year and lower the ordering cost. The bakery could also consider negotiating with the supplier for a lower carrying cost or finding a supplier with a lower carrying cost to reduce the annual carrying cost.

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