Fullerton Wine Company is a retailer that sells vintage wines.The company has established a policy of reordering inventory every 30 days.A recently employed MBA has considered Fullerton's inventory problem from the EOQ model viewpoint.If the following constitute the relevant data,how does the current policy compare with the optimal policy?Ordering cost = $10 per orderCarrying cost = 20% of purchase pricePurchase price = $10 per unitTotal sales for year = 1,000 unitsSafety stock = 0

Question

Fullerton Wine Company is a retailer that sells vintage wines.The company has established a policy of reordering inventory every 30 days.A recently employed MBA has considered Fullerton's inventory problem from the EOQ model viewpoint.If the following constitute the relevant data,how does the current policy compare with the optimal policy?​Ordering cost = $10 per orderCarrying cost = 20% of purchase pricePurchase price = $10 per unitTotal sales for year = 1,000 unitsSafety stock = 0

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) model is designed to minimize the total cost of inventory management by finding the optimal order quantity. The EOQ formula is $\sqrt{(2DS)/H}$, where $D$ is the demand (1000 units/year), $S$ is the ordering cost ($10/order), and $H$ is the carrying cost per unit per year (20% of $10 = $2/unit/year). Plugging in the values, we get EOQ = $\sqrt{(2*1000*10)/2}$ = $\sqrt{10000}$ = 100 units. With an EOQ of 100 units and 12 orders per year (1000 units / 100 units per order), compared to the current policy of ordering every 30 days (about 12.17 orders per year), the total costs under the EOQ model would be lower than the current policy, indicating that the current policy is not optimal. The specific calculation of the total cost difference requires further information but based on the EOQ principles, the current policy is less efficient.

Fullerton Wine Company Is a Retailer That Sells Vintage Wines