Answer to Question #65745 in Statistics and Probability for Amanpour

Question

A grocery shop sell milk packets containing half a litre of milk. It makes bulk purchase of the same from the nearby city. Every time a purchase is made, it incurs a cost of Rs.50 towards transportation. The daily demand of packets is about 250. The holding cost is Rs. 0.10 for a packet per day to preserve it in a refrigerator. Determine the optimum quantity of a bulk purchase and the cycle time.

Answer 1

If cost of transportation is Rs.50, the daily demand of packets is about 250 and the holding cost is Rs. 0.10 for a packet per day to preserve it in a refrigerator, then the holding of additional 250 packets will cost 250*0.1 = Rs 25, so the holding of additional 500 units will cost Rs 50, which is equal to the cost of transportation, so the optimum quantity of a bulk purchase is 750 packets and the cycle time is 3 days, because every 3 days there will be a bulk purchase.