Question

A restaurant offers a special lemonade for its guest. Their annual demand is 1.500 bottles where the price per bottle is $ 120 if the restaurant order fewer than 100 bottles per order. The restaurant will get 15% discount if the restaurant order at least 100 bottles per order. The ordering cost is $80 for each order. The inventory holding cost is $30 per bottle per year for its inventory.

a. Define the Economic Order of Quantity in English using your own words.

b. Calculate the Economic Order of Quantity.

c. Calculate the total annual holding, ordering, and item cost for the EOQ.

d. Calculate the total annual holding, ordering, and item cost for an order quantity of 100 bottles.

e. How much the total cost can be saved if the restaurant decides to order 100 bottles?

Answer 1

a. Economic order quantity minimises the sum of the annual order cost and annual holding cost.

b and c.

Annual demand, D=		1500
Order cost or setup cost, S		$80
item cost		$120.00
holding cost per year, H=		$30.0
Economic Order quantity, Q=	squareroot(2*S*D/H)	89
annual holding cost=	Q*H/2	$1,341.64
Annual ordering cost=	D*S/Q	$1,341.64
Annual Item cost=	D*item cost	$180,000

d.

Annual demand, D=		1500
Order cost or setup cost, S		$80
item cost	120*0.85	$102.00
holding cost per year, H=		$30.0
Order quantity, Q=		100
annual holding cost=	Q*H/2	$1,500.00
Annual ordering cost=	D*S/Q	$1,200.00
Total item cost=	D*item cost	$153,000

e. Total savings= Sum of cost for Q= 100 - Sum of cost for Q= 89

Total savings= 180000+1341.64+1341.64 - 1500-1200-153000 = $26,983