You work at DeliWine, a wine retailer. DeliWine sources one of their best sellin

Question

You work at DeliWine, a wine retailer. DeliWine sources one of their best selling wines, BeauRoux, from a France wine distributor. The cost of placing an order is $ 513 and the annual holding cost rate of DeliWine is 14 %. The lead time is 2 weeks and DeliWine only pays for the goods when the shipment arrives at their distribution center. Assume that there are 48 weeks in a year.

The annual demand for BeauRoux is very stable at 34954 bottles. The costs of BeauRoux is $ 78 per bottle.

Question:

BeauRoux is packed in a special bottle that requires very careful handling. For large deliveries, some extra employees are needed to help unpack. You pointed to your manager that there is an extra handling cost of $0.34 for each bottle of BeauRoux if the order for BeauRoux is larger than 409 bottles. (You can consider that each bottle costs $0.34 more if the order for BeauRoux is larger than 409.)

What is the order size that will minimize total costs considering the extra handling costs?

Explanation / Answer

Annual Demand (D) = 34954

Holding cost = 14% of 78 + 0.34 = $11.26

Cost of order = $513

EOQ = Sqrt((2*D*S)/H) = Sqrt((2*34954*513)/11.26) = 1784.649 = 1785(rounding off)

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