Question

A liquor warehouse expects to sell 10,000 bottles of scotch whiskey in a year. Each bottle costs $12, plus a fixed charge of $125 per order. If it costs $10 to store a bottle for a year, how many bottles should be ordered at a time and how many orders should the warehouse place in a year to minimize inventory costs?

Answer 1

Answer:

500 bottles should be ordered at a time.

20 orders should the warehouse place in a year to minimize inventory costs.

Explanation:

The number of bottles which minimizes the warehouse cost is known as the economic order quantity.

Economic Order quantity minimizes both the holding or carrying cost of inventory as well as the ordering cost.

Economic Order quantity = √((2 × Annual demand × cost per order) / Holding cost per unit)

                                          = √((2 × 10,000 × $125) / $10)

                                          = 500 bottles

Number of Order = Total Demand / Economic Order Quantity

                             =  10,000 / 500

                             =  20 orders

Conclusion :

500 bottles should be ordered at a time.

20 orders should the warehouse place in a year to minimize inventory costs.