One of the most-often sold items at a grocery store is sugar. The weekly demand

Question

One of the most-often sold items at a grocery store is sugar. The weekly demand for sugar at a local grocery store is 10,000 two-pound bags that sell for $9 each. The standard deviation in demand is 2,000 bags per week, and the holding costs can be estimated at 1% per week (i.e., some cost of having to throw out sugar that has passed its sell-by date). The cost for an order is $250 based on the fee paid to the party that delivers the sugar (who needs two weeks to deliver a new batch). Determine the economic order quantity. A: Approximately 3 B: Approximately 7,500 C: Approximately 10,000 D: Approximately 5,500

Explanation / Answer

Let,

D = Weekly demand = 10,000 bags

C = cost per bag = $9

I = weekly holding per bag = 1% of bag cost

H = Weekly holding cost = 0.01 x $9 = $0.09

S = cost of ordering = $250

The economic order quantity (EOQ) is given as follows:

Q* = (2*D*S/H) = (2*10000*250/ 0.09)

Q* = 7453.56

Approximate EOQ = 7,500 bags

Correct option: B

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