Question

Safeway supermarkets sells, among thousands of other items, delicious scrumptious bananas.  They’re fantastic, but spoil easily, so they can’t keep too many in inventory at a time.   Their temperture-controlled storage unit can hold 600 bunches of bananas, which is how much they order at a time.  Annual banana demand is 12,000 bunches.  The annual holding cost rate is $1.5 per banana bunch, and each order costs him $50 to place each order. Assuming a uniform rate of consumption:    

a)  How much does Safeway spend on total inventory with their current ordering policy?

b)  How much would Safeway save in inventory costs if they used an economic order quantity (EOQ) model for order quantities?

Answer 1

Current ordering quantity = Q = 600 bunches

Annual Demand = D = 12,000 bunches

Annual Holding cost = H = $1.5

Ordering cost = S = $50

Current Total cost = Annual Ordering cost + Annual Holding cost = 1000 + 450 = $1450

a) Hence, Safeway spends $1450 on total inventory with their current ordering policy

EOQ = = = 894.43 bunches

Total cost for EOQ = Annual Ordering cost + Annual Holding cost = 670.82 + 670.82 = $1,343.64

Savings = 1450 - 1343.64 = $106.36

b) Safeway would save $106.36 in inventory costs if they used an economic order quantity (EOQ) model for order quantities.

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