Question

The demand for spring water at the SLC WalMart is 600 liters per week. The setup cost for placing an order to replenish inventory is $25. The order is delivered by the supplier which charges WalMart $0.10/liter for the cost of transportation from the Rocky Mountains to SLC. This transportation cost increases the cost of water to $1.25/liter. The water loses its freshness while stored at the SLC WalMart. To account for this, the WalMart charges an annual holding cost of $2.6/liter.
Required:
a. Determine the WalMart's Economic Order Quantity (in liters)?
b. How often should WalMart order for water (in weeks) ?

Answer 1

Answer:

Results are below.

Explanation:

Economic order quantity (EOQ) is the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs.

Economic order quantity (EOQ)= √[(2*D*S)/H]

D= Demand in units

S= Order cost

H= Holding cost

Since:

D= 600*52= 31,200

S= $25

H= $2.6

Replacing:

EOQ= 2√[(2*31,200*25) / 2.6]

EOQ= 775 units

To calculate the time between orders, we need to use the following formula:

Time between orders= EOQ / Weekly demand

Timer between orders= 775 / 600

Time between orders= 1.3 weeks