Question

how to calculate economy order quantity of A&W restaurant?

Answer 1

Economy order quantity is the method to calculate the ideal order quantity that the company should purchase to minimize the inventory costs, such as holding or storage costs. It is a part of the inventory process that goes on continuously so that the managers can monitor the inventory at all the time, and have a fixed inventory requirement so that the company can order the exact amount of inventory in the future. It is a valuable and crucial method that the small business owners should use to have the right amount of inventory in hand and make related decisions. The model assumes that the demand in the environment is constant, and the rate of inventory is depleting until it reaches the zero level. Then, the company decides the amount of inventory so that the level reaches the beginning level. The mangers can calculate the economic order quantity by taking.

“ the square root of twice the annual demand multiplied by the cost per order divided by the holding cost.”

Annual demand is the total demand for the product or service in the financial year. The cost per order defines the cost of one order. The holding cost is the cost of storing goods. A&W restaurant is the American fast-food chain. The EOQ of the restaurant is calculated using the formula as mentioned earlier. Hence, the formula is the same for every company. For example: If the quantity of the goods is 1,000, holding the inventory is $5 per year, and the fixed cost to place the order is $2. The EOQ is the square root of (2 X 1,000 X $2 / $5)= 2.83 (rounding).