Question

Gentle Ben's Bar and Restaurant uses 5,000 quart bottles of an imported wine each year. The effervescent wine costs $3 per bottle and is served only in whole bottles because it loses its bubbles quickly. Ben figures that it costs $10 each time an order is placed, and holding costs are 20 percent of the purchase price. It takes three weeks for an order to arrive. Weekly demand is 100 bottles (closed two weeks per year) with a standard deviation of 30 bottles. Ben would like to use an inventory system that minimizes inventory cost and will provide a 95 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 NORM.S.INV() function to find the z value. Round z value to 2 decimal places and final answer to the nearest whole number.) Inventory level bottles

Answer 1

EOQ = [ 2 x demand per annum x cost of ordering / cost of holding]^0.5

= [ 2 x 5000x10/3x0.2]^0.5

= 408 units

(ii)Reorder level = demand during lead time + safety stock

= 3 x100+ z xSD x ( Lead time)^0.5

=300+ 1.96* 30*(3)^0.5 = 402