Gentle Ben\'s Bar and Restaurant uses 7,100 quart bottles of an imported wine ea

Question

Gentle Ben's Bar and Restaurant uses 7,100 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 $10 each time an order is placed, and holding costs are 30 percent of the purchase price. It takes three weeks for an order to arrive. Weekly demand is 142 bottles (closed two weeks per year) with a standard deviation of 25 bottles. Ben would like to use an inventory system that minimizes inventory cost and will provide a 90 percent service probability.

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

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.)

Explanation / Answer

a. Economic Ordering Quantity(EOQ) Bottles:

SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Order)

SQRT((2 × 7,100 × $10/ ($8 X 0.3))

SQRT(59,166.667) = 243.24 or 243(rounded off)

b.Inventory level should he place an order:

Re-order point: Lead Time in Days × Daily Average Usage

142 X $8 + 1.64X 51.96

=1221.21

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