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