Whole Nature Foods sells a gluten-free product for which the annual demand is 5,000 boxes. At the moment, it is paying $6.40 for each box; carrying cost is 25% of the unit cost; ordering costs are $25. A new supplier has offered to sell the same item for $6.00 if Whole Nature Foods buys at least 3,000 boxes per order

Question

Whole Nature Foods sells a gluten-free product for which the annual demand is 5,000 boxes. At the moment, it is paying $6.40 for each box; carrying cost is 25% of the unit cost; ordering costs are $25. A new supplier has offered to sell the same item for $6.00 if Whole Nature Foods buys at least 3,000 boxes per order

Answer 1

To determine whether Whole Nature Foods should switch to the new supplier offering a lower price, we need to calculate the total costs for the current supplier and the new supplier and compare them.

Let's start by calculating the total cost for the current supplier.

1. Ordering Cost:
The ordering cost for the current supplier is given as $25 per order.

Since the annual demand for the product is 5,000 boxes and we need to calculate how many orders are placed in a year, we can use the Economic Order Quantity (EOQ) formula. The EOQ formula is:
EOQ = √((2 * Demand * Ordering Cost) / Carrying Cost)

Assuming a carrying cost of 25% of the unit cost, we can calculate the carrying cost per unit by multiplying the unit cost by 25% (0.25).

Carrying Cost per Unit = Unit Cost * 0.25

Then we can calculate the EOQ:
EOQ = √((2 * Demand * Ordering Cost) / Carrying Cost per Unit) = √((2 * 5000 * $25) / (Unit Cost * 0.25))

2. Total Cost:
The total cost for the current supplier can be calculated using the formula:
Total Cost = (Unit Cost * Demand) + (Demand / EOQ) * Ordering Cost + (EOQ / 2) * Carrying Cost per Unit

Now let's calculate the total cost for the current supplier.

Total Cost Current Supplier = (Unit cost * demand) + (Demand / EOQ) * ordering cost + (EOQ / 2) * carrying cost per unit
= ($6.40 * 5000) + (5000 / EOQ) * $25 + (EOQ / 2) * Carrying Cost per Unit

Next, we need to calculate the total cost for the new supplier.

1. Ordering Cost:
For the new supplier, the ordering cost remains the same at $25 per order.

2. Unit Cost:
The new supplier offers a lower price of $6.00 per box, but this price is only valid if Whole Nature Foods buys at least 3,000 boxes per order. Therefore, we need to determine whether the EOQ will be higher or lower than 3,000 boxes.

Using the EOQ formula mentioned earlier, we can calculate the EOQ for the new supplier:
EOQ = √((2 * Demand * Ordering Cost) / Carrying Cost per Unit) = √((2 * 5000 * $25) / (Unit Cost * 0.25))

Now, we can compare the EOQ with the minimum order quantity of 3,000 boxes from the new supplier.

If EOQ ≥ 3,000 boxes, then the new unit cost of $6.00 will be used in the Total Cost calculation. Otherwise, the unit cost will remain at $6.40.

Finally, the total cost for the new supplier can be calculated using the formula:
Total Cost = (Unit Cost * Demand) + (Demand / EOQ) * Ordering Cost + (EOQ / 2) * Carrying Cost per Unit

Now, compare the total costs between the current and new suppliers. If the total cost for the new supplier is lower, it would be more economical for Whole Nature Foods to switch to the new supplier.