Question

Ann Chovies, owner of the Perfect Pasta Pizza Parlor, uses 20 pounds of pepperoni each day in preparing pizzas and is open 360 days a year. Order costs for pepperoni are $10.00 per order, and carrying costs are $2 per pound in average inventory. Lead time for each order is three days, and the pepperoni itself costs $3.00 per pound. What is the economic order quantity for pepperoni? (Tip: Remember to calculate the annual demand)

a) 400 pounds
b) 800 pounds
c) 600 pounds
d) 200 pounds

Answer 1

The economic order quantity for pepperoni is approximately 268 pounds.

Step-by-step explanation:

The Economic Order Quantity (EOQ) is a formula used to determine the optimal order quantity for a product that minimizes the total cost of inventory. The formula for EOQ is:

EOQ = sqrt((2 * demand * ordering cost) / carrying cost)

In this case, the demand for pepperoni is 20 pounds per day, the ordering cost is $10.00 per order, and the carrying cost is $2.00 per pound. We need to calculate the annual demand by multiplying the daily demand by the number of operating days in a year:

Annual demand = 20 pounds/day * 360 days/year = 7,200 pounds/year

Substituting these values into the EOQ formula, we get:

EOQ = sqrt((2 * 7,200 * 10) / 2) = sqrt(72,000) = 268.28 pounds

Rounding to the nearest whole number, the economic order quantity for pepperoni is approximately 268 pounds.