Economic Order Quantity Italia Pizzeria is a popular pizza restaurant near a college campus. Brandon Thayn, an accounting student, works for Italia Pizzeria. After several months at the restaurant, Brandon began to analyze the efficiency of the business, particularly inventory practices. He noticed that the owner had more than 50 items regularly carried in inventory. Of these items, the most expensive to buy and carry was cheese. Cheese was ordered in blocks at $17.50 per block. Annual usage totals 14,000 blocks. Upon questioning the owner, Brandon discovered that the owner did not use any formal model for ordering cheese. It took five days to receive a new order when placed, which was done whenever the inventory of cheese dropped to 200 blocks. The size of the order was usually 400 blocks. The cost of carrying one block of cheese is 10 percent of its purchase price. It costs $40 to place and receive an order. Italia Pizzeria stays open seven days a week and operates 50 weeks a year. The restaurant closes for the last two weeks of December.
1. Compute the total cost of ordering and carrying the cheese inventory under the current policy.
2. Compute the total cost of ordering and carrying cheese if the restaurant were to change to the EOQ. How much would the restaurant save per year by switching policies?
3. If the restaurant uses the EOQ, when should it place an order? How does this compare with the current reorder policy?
4. Conceptual Connection: Suppose that storage space allows a maximum of 600 blocks of cheese. Discuss the inventory policy that should be followed with this restriction.
5. Conceptual Connection: Suppose that the maximum storage is 600 blocks of cheese and that cheese can be held for a maximum of 10 days. The owner will not hold cheese any longer than 10 days in order to ensure the right flavor and quality. Under these conditions, evaluate the owner’s current inventory policy.