In: Operations Management
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?
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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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