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A beer distributor finds that it sells on average 1000 cases a week of regular 12-oz. Budweiser. For this problem assume that demand occurs at a constant rate over a 50-week year. The distributor currently purchases beer at a cost of $8 per case. The inventory-related holding cost (capital, insurance, etc.) for the distributor equals 25% of the value of inventory per year. Each order placed with the supplier costs the distributor $10. What order quantity minimizes the distributor’s total costs?

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Answer:

D = 1,000 x 50

Co = $10

H = 25% x $8 = $2

EOQ =  √2  x  50,000  x $10/2

EOQ = √500,000

EOQ = 707 units

Explanation: In the above calculation, D represents annual demand, which is weekly demand multiplied by 50 weeks. Co denotes ordering cost and H is the holding or carrying cost, which is 25% of the cost price. Thus, EOQ is the square root of 2 x annual demand  x ordering cost divided by holding cost. EOQ is the quantity that minimises the total cost.

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