Snake Pliskin is the owner of the \"Duke of New York\" bar and restaurant. The r

Question

Snake Pliskin is the owner of the "Duke of New York" bar and restaurant. The restaurant is open year round except for a two week vacation period during the summer. Mr. Pliskin uses 5000 one liter bottles of a very fine imported wine, called "Tote Katze", every year. This particular effervescent wine costs $3 per bottle and is served in whole bottles only since it loses its bubbles quickly upon opening. The wine maker, Meyer-Lutzenhardt Wineries, charges a $5 order-processing fee, and a handling fee that depends on the price per bottle (apparently more expensive wine requires special handling). The handling fee (paid on a per order basis) is twice the cost of a single bottle of wine. Mr. Pliskin has calculated that his annual holding costs for "Tote Katze" are 20% of the purchase price of a bottle. It takes two weeks for the wine to arrive once an order has been placed.

Require:

a. What is the economic order quantity for "Tote Katze" wine?

b. What is the relevant total inventory cost associated with that quantity?

c. What is the reorder point for "Tote Katze" wine?

Explanation / Answer

Annual demand = 5000 bottles
Cost per bottle - $3
Order processing cost = $5
Handling Cost = $3*2 = $6 per order
Total Fixed cost per order = 6+5 = $11
Annual holding costs= $3*20% = 0.6

Economic order quantity = ((2* Annual Demand * Odering cost)/Carrying cost)^0.5
=((2*5000*11)/0.6)^0.5 = (183333.33)^0.5 = 428.17 bottles or 428 bottles approx.

b). Total Inventory costs = C(Q/2) + F(D/Q)
Here C= Carrying cost per unit = $0.6
Q = Quantity of each order = 428 bottles
F = Fixed cost per order = $11
D = Annual demand
TIC = 0.6(428/2) + 11(5000/428) = 256.90

c). Reorder point = Average Daily Unit sales * Delivery lead time.
= 5000/50 weeks * 2 weeks = 200 units

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