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Michael Chan operates a small desert shop (with 125 ft2 useable floor area) and plans to...

Michael Chan operates a small desert shop (with 125 ft2 useable floor area) and plans to expand the current product line by selling doughnuts. His estimation of the annual demand is 5,000 doughnuts. He has contacted a local wholesaler who can supply frozen doughnuts at $5 each. The delivery lead time is 2 working days. For Dave, the holding cost of each doughnut per year is 10% of the wholesale unit price, and the ordering cost is $50 per order. There are 250 working days per year. The assumptions of Economic Order Quantity (EOQ) model are satisfied. Show the units and steps of calculation when you answer the following questions. Round the number to ONE decimal place.

1. What is the EOQ if Michael wants to purchase doughnuts from the wholesaler?

2. Based on the EOQ in (1), what is the total annual inventory cost (including the annual purchase cost of the doughnuts)?

3. Based on the EOQ in (1), what is the reorder point (ROP)?

4. Based on the EOQ in (1), what is the time between orders?

business   Operations-Management   
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Answer #1

Economic Order Quantity is the number of unit that is added to the inventory which minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs.

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