Question

Mama Leone's Frozen Pizzas uses 59,000 pounds of cheese per year. Each pound costs $5.50. The ordering cost for the cheese is $657.90 per order, and its carrying cost is $1.29 per pound per year. Calculate the firm's economic order quantity (EOQ) for the cheese. Mama Leone's operates 260 days per year and maintains a minimum inventory level of 55 days' worth of cheese. Assuming that the lead time to receive orders of cheese is 33 days, calculate the reorder point.

The EOQ that minimizes the total inventory costs is pounds of cheese. (Round to the nearest whole number.)

The reorder point for Mama Leone's is pounds of cheese. (Round to the nearest pound.)

Answer 1

Answer : Calculation of Economic Quantity :

Economic Order Quantity = [ (2 * Annual Consumption * Cost per order) / Carrying Cost per year]^(1/2)

Annual Consumption = 59000 pounds

Cost per order = 657.90

Carrying Cost per year = 1.29

Economic Order Quantity = [ (2 * 59000 * 657.90) / 1.29]^(1/2)

= 7757.57694128 or 7758 pounds

Reorder Point = (Average Usage rate * Average Lead Time) + Safety Stock

Average Usage rate = 59000 / 260 = 226.923076923

Average Lead Time = 33 days

Minimum Lead Time = 55 days

Reoder Point = (226.923076923 * 33) + (226.9230769323 * 55)

= 19969.2307692 or 19969 pounds