The Pawtucket Brewery uses approximately 35000 bottles a month for its signature

Question

The Pawtucket Brewery uses approximately 35000 bottles a month for its signature product, the Pawtucket Patriot Ale. Due to storage limitations, a lot size of 5000 bottleshas been used. The monthly holding costs are 18cents a bottle and the reordering cost is $50 per order. The company operates on an average of 20 days a month.

a.What penalty is the company incurring by its present order size?

b.The manager would prefer ordering 10 times each month, but would have to justify achange in the order size. One possibility is to simplify order processing to reduce the ordering cost. What ordering cost would enable the manager to justify ordering everyother day (i.e. 10 times a month)?

Explanation / Answer

Demand (D) = 35,0000

Holding cost (H) = 18cents = 18/60 $ = 0.3 $

Setup cost (S) = 50$

Q = sqrt(2*D*S/H) = sqrt(2*35000*50/.3) = 3,416 units

Optimal quantity = 3,416 units

Excess order = 5,000-3,416 = 1,584 units

Inventory cost for holding 1,584 units = 1,584*0.3 = $475.2

Company is incurring a penalty of $475.2 in form of Inventroy cost

b. Number of Orders = 10

Quantity in each order = 3,500

3,500 = sqrt(2*35000*S/0.3)

Solving equation for S

S= 52.5$

Total order cost earlier = 7* 50 = 350$

Present order cost = 10*52.5 = 525$

Increase in order cost = $175

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