Question

Ye’ Olde Barrel Shop sells oak barrels to a local winery. The Master Cooper would like to reduce her oak lumber inventory by determining the optimal number of oak boards to order. The annual demand averages 55,000 boards and the order cost is $21.00 per order. Holding cost is estimated to be 40%. The purchase cost of each board is $14.00. The standard deviation of daily demand is 5 boards. The standard deviation of lead time is 3.0 days. Assume 268 days in the year and an average lead time of 7 days.

What is the EOQ?

If a service level of 98% is desired during the reorder interval, what is the reorder point? Remember you cannot order partial units. To avoid rounding errors, round to the nearest integer in the LAST step.

Answer 1

The EOQ is 642

The reorder point is 2,699

Step-by-step explanation:

In order to calculate the EOQ we would have to calculate the following formila:

EOQ=√2DS/H

According to the given data we have the following:

D = 55,000

S = 21

H=40%*purchase cost

H=0.4*14 = 5.6

Therefore, EOQ=√(2*55,000*21)/5.6

EOQ=642

To calculate the reorder point If a service level of 98% is desired during the reorder interval, we would have to use the following formula:

reorder point=dL+z√σ∧2dL+σ∧2Ld∧2

reorder point=(7*205.22)+√(2.05*√(5∧2*7)+(3∧2*205.22∧2)

reorder point=2,699