Question

Sweet T Shoppe uses 4 pounds of a specialty tea weekly; each pound costs $16. Carrying costs are $1 per pound per week because space is very scarce. It costs the firm $8 to prepare an order. Assume the basic EOQ model with no shortages applies. Assume 52 weeks per year, closed on Mondays.

a. How many pounds should Sweet T order at a time?

b. What is total annual cost (excluding item cost) of managing this item on a cost-minimizing basis?

c. In pursuing lowest annual total cost, how many orders should Sweet T place annually?

d. How many days will there be between orders (assume 312 operating days) if Sweet T practices EOQ behavior?

Answer 1

Economic Order Quantity refers to the number of unit the company should add to the inventory and the order is made to minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs. Reorder point is the level of inventory which the firm holds in stock and when the inventory level reach this point, the firm must reorder the item.

EOQ act as a review inventory system to monitor the inventory level continuously and once the level reaches the reorder point, a fixed quantity of order is placed. Thus EOQ helps in calculating reorder point and optimal reorder quantity to avoid shortage of inventory.