Flanders Bar and Grill orders cleaning supply kits using the EOQ model. The restaurant estimates that it uses 525 kits per year. The purchase price is governed by a quantity discount structure. If the restaurant orders 100 or more units, the price per kit is $11. Below 100 units, the price is $12 per kit. What is the optimal order quantity?

Question

Quizplus · Accepted Answer

Using the EOQ formula: 
EOQ = √((2AD)/H)
Where:
A = Annual demand = 525 kits
D = Ordering cost = $12 per order
H = Holding cost per unit = $1
If the restaurant orders 100 or more units the price per kit is $11, which is less than if they order less than 100 kits. Therefore, we can consider purchasing at least 100 kits. 
Substituting the values: 
EOQ = √((2 x 525 x 12)/1) = √12600 = 112.24
Since we should consider ordering at least 100 kits, the optimal order quantity is 100.

Flanders Bar and Grill Orders Cleaning Supply Kits Using the EOQ