Question

Godfather Pizza is a popular pizza restaurant near a university campus. This pizza shop is very popular as the price is reasonable, and the quality of the pizza is excellent. It has broad range of varieties, which students can choose the type of dough and topping. The everyday sales activity is high, which keep this pizza shop busy. However, Greg Taylor, the accountant   noticed that there is a small profit compares to the sales. Greg starts analyzing the efficiency of the business, particularly inventory practices. He noticed that the owner had more than 60 items regularly carried in inventory. Of these items, the most expensive to buy and carry was cheese. Cheese was ordered in blocks at $27.50 per block. Annual usage totals 16 000 blocks.

Upon questioning the owner, Greg found that there are problems in managing the cheese. The size of the order was usually 600 blocks. The cost of carrying one block of cheese is 10% of its purchase price. It took 7 ten days to receive a new order when placed, which was done whenever the inventory of cheese dropped to 500 blocks. It costs $50 to place and receive an order.

Godfather Pizza stays open five days a week and operates 50 weeks a year. It closes during public holiday and Christmas day.

Requirements:

1. Calculate the total ordering and carrying cost under the current policy. Support your answer with calculation. (1 mark)
2. If Greg tries to use EOQ formula, how much the company will save inventory cost per year? Support your answer with calculation ( 2 marks)
3. If the company uses EOQ formulas, when the company should put the order? Support your answer with calculation (1 mark)
4. Suppose the warehouse only has space to carry 600 blocks of cheese and to keep the cheese fresh, it must not be kept for more than 10 days. Please advise whether EOQ is a better policy than the current one? Support your answer with calculation
5. Suppose Greg likes to introduce a contemporary inventory policy by having alliances with suppliers. What are the best steps he must take to implement the new policy? Explain what are the obstacles that he may have during the transition period? Please show the calculation whether this new policy will give advantage or disadvantage to the company
   
   Need help in answering this question immediately please

Answer 1

500As per Current System :

No. of orders per year = 16000/600 = 26.67 times per year

Total Ordering Cost = 26.67 orders  * $50 per order = $1333.33

Daily usage = 16000 blocks / (50 weeks *5 days per week) = 64 blocks per day

Average inventory when Cheese blocks arrive = 500 - 7*64 = 52 blocks

Average no of blocks carried throughout the year = 600/2 + 52 = 352 blocks

Average Carrying cost = 352*$27.50*10% = $968

Total ordering and carrying cost under the current policy = $1333.33+$968 = $2301.33

EOQ = (2*A*O/C)^0.5

where A is the Annual Demand, O is the ordering cost per order and C is the carrying cost per order

So, EOQ = (2*16000*50/ 2.75)^0.5

=762.77 or say 763 blocks

So, Total Ordering costs under EOQ = 16000/763* 50 = $1048.49

Average no of blocks carried throughout the year = 763/2 = 381.50 blocks

Average Carrying cost = 381.50*$27.50*10% = $1049.13

Total ordering and carrying cost under the current policy = $1048.49+$1049.13 = $2097.62

So,

Inventory cost saved per year = 2301.33 - 2097.62 = $203.72

Reorder point should be such that in 7 days the stock becomes 0

Reorder point = 7 days * 64 blocks per day = 448 blocks

So, reordering should be done whenever the cheese stock is below 448 days