A cookie factory uses chocolate at a constant rate and needs 4,000 pounds every week. The factory operates 50 weeks per year. Their supplier sells chocolate in 50-pound bags at a price of $20 per bag. It costs the factory $64 every time the factory places an order of chocolate. The factory’s holding cost is based on its cost of capital, which is 25% per year.
1) The factory orders 16,000 pounds of chocolate from its supplier every 4 weeks. Calculate the factory’s corresponding annual total average inventory cost (average holding cost, average fixed cost of ordering, and average variable costs of ordering per year).
2) The factory tries out a new technology that will reduce fixed cost of ordering to zero. However, every time the factory places an order, they are charged $26 to use the new technology. Maintenance of this new technology is $200 per year. Should the factory carry on using this new technology? Why? (for this question to be answered, you will need to calculate the new EOQ and the corresponding average total inventory cost.)
3) Assume the factory now purchases the technology. For every $1 the factory invests in the technology returns its investors 50 cents per year. How does this investment affect the factory’s chocolate order quantity? Quantify your answer.