6. The Kirei-Hana Japanese Steak House in San Francisco consumes 4,000 pounds of
ID: 359474 • Letter: 6
Question
6. The Kirei-Hana Japanese Steak House in San Francisco consumes 4,000 pounds of sirloin steak per month. Yama Hirai, the new restaurant manager, recently completed an MBA degree. He wants to improve the management of the inventory of raw steak at the restaurant. He estimates that the setup cost is $75 for each order, and he is comfortable with using a 40% holding cost rate. Assume that the current cost of the sirloin steak to the steak house is $6 per pound.
a. What should the standing order quantity be for steak, and how often will orders be placed?
b. The supplier has just offered Mr. Hirai an opportunity to take advantage of a one-time discount price of $5.10 per pound (a 15% savings off the regular price) on as many pounds as he would like to buy. How many pounds of steak should Mr. Hirai purchase for this single order?
Explanation / Answer
Answer to question #a :
Standing Order Quantity for Steak will be defined basis Economic Order Quantity ( EOQ ) model.
Economic Order Quantity ( EOQ ) will be determined as :
EOQ = square root ( 2 x Co X D/ Ch )
Where,
Co = Order set up cost = $75 / order
D = Annual Demand = 4000 / month x 12 month = 48000 per annum
Ch = Annual unit inventory holding cost = 40% of $ 6 per Pound = $2.4 / Pound
Therefore ,
EOQ = Square root ( 2 x 75 x 48000 / 2.4 )
= 1732.05 ( 1732 rounded to nearest whole number)
Therefore Standing order quantity will be = 1732
Frequency of order placement
= EOQ/ Order Placement x 365
= 1732/48000 x 365
= 13.17 days
ECONOMIC ORDER QUANTITY = 1732
ORDER SHOULD BE PLACED EVERY 13.17 DAYS
Answer to question #b:
The revised price now = $5.1
Therefore , revised annual inventory holding cost = 40 % of $5.1 = $2.04
Therefore ,
EOQ = Square root ( 2 x 75 x 48000/2.04) = 1878.67 ( 1879 rounded to nearest whole number )
MR HIRAI SHOULD PURCHASE 1879 POUNDS FOR THIS SINGLE ORDER
ECONOMIC ORDER QUANTITY = 1732
ORDER SHOULD BE PLACED EVERY 13.17 DAYS
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