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. What is the total cost of ordering and holding sugar

the total cost of ordering and holding sugar is $1,000 per year

Explanation:

Step 1 Calculate the Economic Order Quantity(EOQ).

EOQ = √(2×Total Demand×Ordering cost)/ Holding Cost per Unit

        = √(2×250×20×5)/20

        = 50

Step 2 Calculate the total  cost of ordering and holding sugar

Total cost = Ordering Cost + Holding Cost

                = (250×20)/50 × $5 + 50/2 × $20

                = $500+$500

                = $1,000

Therefore,  the total cost of ordering and holding sugar is $1,000 per year

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