# Operations Management question: EOQ Guy’s BBQ Grille in Saskatoon serves 5,000 steaks per year. The steaks are kept in a freezer. The holding cost for each steak is $1.50. The cost to place an...

Operations Management question: EOQ

Guy’s BBQ Grille in Saskatoon serves 5,000 steaks per year. The steaks are kept in a freezer. The holding cost for each steak is $1.50. The cost to place an order is $45. The lead time is 4 days and there are 250 working days per year.

**- What is the optimal order quantity (EOQ)?**

**- What is the average inventory? Hint: Use the EOQ calculated in i).**

**- What is the annual inventory holding cost?**

**- How many orders would be placed each year?**

**- What is the annual ordering cost?**

**- What is the total annual cost to manage the inventory?**

**- How many days on average are there between orders?**

**- What is ROP?**

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### 1 Answer

*Question 1*: EOQ or the Economic Order Quantity is calculated by getting the square root of (2*annual demand*order cost)/holding cost. In this case get the square root of (2*5000*45)/1.5=**547.72**

*Question 2*: Average inventory in units is calculated by dividing the EOQ by 2. In this case 547.72/2=**273.86**

*Question 3*: The annual inventory holding cost will be calculated by dividing the EOQ by 2 and multiplying the product by the holding cost for each steak. In this case (547.72/2)*1.5=**410.79**

*Question 4*: The number of orders that would be placed each year would be calculated by dividing the annual demand by the EOQ. In this case 5000/547.72=**9.13 or 9 orders**

*Question 5*: The annual ordering cost would be calculated by dividing the annual demand by the EOQ and multiplying the result it by the order cost. In this case (5000/547.72)*45= **410.79**

*Question 6*: The total annual cost to manage the inventory would be calculated by getting the sum of the annual ordering cost and annual holding cost. In this case 410.79+410.79=**821.58**

*Question 7*: The number of days between orders would be calculated by multiplying the number of lead days by the number of orders. In this case 4*9=**36 days**

*Question 8*: ROP refers to the reorder point which is the level of inventory that is reached to necessitate an order or a fresh batch.

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