Question

Gentle Ben's Bar and Restaurant uses 6,500 quart bottles of an imported wine each year. The effervescent wine costs $8 per bottle and is served only in whole bottles because it loses its bubbles quickly. Ben figures that it costs $20 each time an order is placed, and holding costs are 35 percent of the purchase price. It takes five weeks for an order to arrive. Weekly demand is 130 bottles (closed two weeks per year) with a standard deviation of 35 bottles.

Ben would like to use an inventory system that minimizes inventory cost and will provide a 99 percent service probability.

a. What is the economic quantity for Ben to order? (Round your answer to the nearest whole number.)

Economic order quantity

bottles

b. At what inventory level should he place an order? (Use Excel's NORMSINV() function to find the correct critical value for the given ?-level. Do not round intermediate calculations. Round "z" value to 2 decimal places and final answer to the nearest whole number.)

Inventory level

bottles

Answer 1

a. Economic order quantity bottles = sqrt(2*DS/H)

Demand = 130*(52-2)= 6500

H = 35%*8= 2.8

S = 20

Economic order quantity bottles= sqrt(2*6500*20/2.8)= 305 bottles

b. Reorder Point = Normal consumption during lead-time + Safety Stock .

Normal consumption during lead-time = 3*130= 390

Safety stock = Z*SQRT(Avg. Lead Time * Standard Deviation of Demand^2 + Avg. Demand^2 * Standard Deviation of Lead Time^2)

Safety stock = 2.33*sqrt(3*35^2 )= 141.24

Reorder Point =390 +141.24 = 531.24

inventory level should he place an order = 532 bottles