Golden Beer Brewery is located in Milwaukee, Wisconsin. For over 50 years now th
ID: 467158 • Letter: G
Question
Golden Beer Brewery is located in Milwaukee, Wisconsin. For over 50 years now the company has been producing and distributing beer for happy customers across the United States. Current demand for the product is 8, 400, 000 six-packs of beer per year. (For this exercise, consider a six-pack to be equivalent one "unit.") The selling price of each six-pack is $3.60. Currently all finished beer is stored and shipped from a warehouse just outside of Milwaukee. Mr. Mick A. Lobe, the supervising manager at the Milwaukee distribution warehouse, has been asked to review the costs associated with current inventory conditions. After talking with Golden accountants he has determined that the unit cost of each six-pack is 80% of the selling price, annual interest rate of capital tied up in inventor)' is 15% of its cost, and storage and handling cost is expressed as 10% of the unit cost. The order processor, Ms. May Kemdrunk, has informed Mick that setup cost per order is $83.50. a. What is the EOQ for a six-pack of beer at the Milwaukee warehouse? b. Assuming that the EOQ is ordered, what is the average inventory (in units) at the Milwaukee warehouse? c. Assuming that the EOQ is ordered, what is the annual holding cost? d. Assuming that the EOQ is ordered, what is the annual setup cost? e. What is the total annual total (holding plus setup) cost for the Milwaukee warehouse?Explanation / Answer
a. EOQ = (2*annual demand*cost per order/holding cost per unit)^0.5
annual demand = 8,400,000 units. cost per order = $83.50. unit cost = 80% of selling price = 80% of $3.60 = $2.88
Holding cost = capital tied in inventory+handing and storage costs
capital tied in inventory = 15% of cost. capital tied in inventory per unit = 15% of the cost of 1 unit = 15% of $2.88 = $0.43. handling and storage costs = 10% of unit cost = 10% of 2.88 = 0.29. Thus holding cost per unit = 0.43+0.29 = $0.72
Thus EOQ = (2*8,400,000*83.50/0.72)^0.5 = 44,139.93 or 44,140 units/six packs (rounded off).
b. average inventory = EOQ/2 = 44,140/2 = 22,070 units or six packs.
c. Annual holding cost = average inventory*holding cost per unit per year = 22,070 six packs*$0.72 per year = $15,890.40
d. Annual set up cost = set up cost per order*(annual demand/EOQ) = 83.5*(8,400,000/44,140) = $15,890.35
e. Total cost = holding cost+set up cost = 15,890.40+15,890.35 = $31,780.75
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