An Italian restaurant sells 80 cases of wine per month. The cost of ordering and receiving a shipment of wine is $5. The cost of holding a case of wine in the restaurant cellar for a month is $2. Use the EOQ model to determine the most economic order quantity for the wine.

Question

Quizplus · Accepted Answer

Using the EOQ formula, where:
D = annual demand = 80 cases/month x 12 months = 960 cases/year
C = cost per order = $5/order
H = holding cost per case per year = $2/case/month x 12 months = $24/case/year

EOQ = sqrt[(2DC)/H]
EOQ = sqrt[(2 x 960 x 5)/24]
EOQ = sqrt[800]
EOQ = 28.28 cases

However, since the demand is monthly, we need to adjust the EOQ to a monthly order quantity:
Monthly Order Quantity = EOQ/Order Cycle Time
Order Cycle Time = D/EOQ

Monthly Order Quantity = 28.28/(960/28.28) = 20 cases

Therefore, the most economic order quantity for the wine is 20 cases (choice letter C). This means that the restaurant should order 20 cases of wine every time they need to restock, which would minimize their total cost of ordering and holding wine inventory.

An Italian Restaurant Sells 80 Cases of Wine Per Month