Question

Pizza Hut purchases its pizza delivery boxes from a printing supplier. Pizza Hut delivers on average 350 pizzas each month (assume deterministic demand). Boxes cost 41 cents each, and each order costs $15.50 to process. Because of limited storage space, the manager wants to charge inventory holding at 21 percent of the cost. The lead time is 5 days. Use the EOQ Model Excel template in to determine the economic order quantity.

Answer 1

The EOQ Model for Pizza Hut calculates the optimal number of pizza delivery boxes to order by using the annual demand, cost per order, and holding cost rate to minimize total inventory costs.

Step-by-step explanation:

The Economic Order Quantity (EOQ) Model is a widely used tool in inventory management that allows companies like Pizza Hut to determine the optimal number of pizza delivery boxes to order, minimizing the sum of ordering, holding, and stock out costs. To calculate the EOQ for Pizza Hut, we'll use the information provided: Pizza Hut delivers on average 350 pizzas each month, boxes cost 41 cents each, each order costs $15.50 to process, inventory holding is 21 percent of the cost, and the lead time is 5 days.

We begin by calculating the annual demand (D), which is the average number of pizzas delivered per month (350) multiplied by 12 (months), giving us 4200 boxes. The cost per order (S) is $15.50. The holding cost per unit per year (H) is calculated as 21% of the cost of one box, which is 0.21 × $0.41 = $0.0861 per box. Now, we apply the EOQ formula:

EOQ = √((2 × D × S) / H)

Plugging in the values we get:

EOQ = √((2 × 4200 × 15.50) / 0.0861)

After calculating, the optimal order quantity (EOQ) is found. This calculation informs Pizza Hut of how many boxes to order each time to minimize costs associated with the inventory of pizza delivery boxes.