Question

Mama Leone's Frozen Pizzas uses 41,000 pounds of cheese per year. Each pound costs $5.50. The ordering cost for the cheese is $1357.30 per order, and its carrying cost is $2.77 per pound per year. Calculate the firm's economic order quantity (EOQ) for the cheese. Mama Leone's operates 220 days per year and maintains a minimum inventory level of 4 days' worth of cheese. Assuming that the lead time to receive orders of cheese is 3 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

Calculation of the EOQ :-

EOQ = (2 * Annual demand * Ordering cost per order / carrying
cost per year per unit )^{1/2}

EOQ = (2 * 41,000 * 1357.3 / 2.77)^{1/2} =
6,338.7696 pound = 6,339 pounds

Total investory cost At EOQ :-

Inventory cost at EOQ = purchase cost pounds + Total ordering cost + total carrying cost

= units * unit price + (annual demand / EOQ units) * ordering cost per orders + (EOQ units / 2 ) * carrying cost per unit per year

= 6,339 * 5.5 + (41,000 / 6339) * 1357.3 + (6339/2) * 2.77

Inventory cost At EOQ = $243,058.39 = $ 243,058

Calculation of the Reorder point :-

Reorder point = (Average consumption per day * lead time ) + Safety stock

= [ (41,000 / 220) * 3days ] + [ ( 41,000 / 220) * 4days]

= 1,304.545 units

Reorder point = 1305

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