Andronicos In The Financial Center Is Open 300 Days A Year
Andronicos In The Financial Center Is Open 300 Days A Year They Sell
Andronico’s in the financial center operates 300 days annually, selling organic hummus with daily sales approximately normally distributed, averaging 100 tubs and a standard deviation of 25 tubs. The wholesale cost per tub is $1.80, and the company estimates annual holding costs at 20% of this cost. Ordering costs are fixed at $50 per order, with a 4-day lead time. The company is evaluating their inventory management options, including calculating the economic order quantity (EOQ), total annual cycle-stock holding costs, total order costs, and exploring a shift to in-house production, which involves calculating the economic production quantity (EPQ).
Paper For Above instruction
The inventory management of perishable and high-demand products such as organic hummus requires optimization to balance various costs, including ordering, holding, and production costs. This analysis employs classical inventory models—specifically, the Economic Order Quantity (EOQ) and the Economic Production Quantity (EPQ)—to determine cost-effective procurement and production strategies for Andronico's in the financial center.
Calculation of EOQ for Organic Hummus
The EOQ model is fundamental in inventory management when determining the order size that minimizes the total costs associated with ordering and holding inventory. The EOQ formula is expressed as:
EOQ = √(2DS / H)
Where:
- D = Annual demand (units/year)
- S = Ordering cost per order
- H = Holding cost per unit per year
Given parameters:
- D = 100 tubs/day × 300 days = 30,000 tubs/year
- S = $50
- Wholesale cost per tub = $1.80
- Annual holding cost rate = 20% of wholesale cost
- H = 20% of $1.80 = $0.36 per tub per year
Calculating EOQ:
EOQ = √(2 × 30,000 × 50 / 0.36) = √(3,000,000 / 0.36) = √8,333,333.33 ≈ 2886 tubs
Total Annual Cycle-Stock Holding Costs
Cycle-stock is the average inventory held, which is half of the order quantity:
Average inventory = EOQ / 2 ≈ 2886 / 2 ≈ 1443 tubs
Total annual holding costs are then:
Total holding costs = Average inventory × H = 1443 × 0.36 ≈ $519.48
Total Annual Fixed Order Costs
The total annual ordering cost equals:
Number of orders per year = D / EOQ ≈ 30,000 / 2886 ≈ 10.39 ≈ 10.4 orders
Total order costs:
Total ordering costs = Number of orders × S ≈ 10.4 × 50 ≈ $520
In-House Production: Economic Production Quantity (EPQ)
Switching to in-house production affects inventory management due to the production process's differing characteristics. EPQ is suitable when items are produced and sold simultaneously, with the production rate higher than the demand rate. The EPQ formula is:
EPQ = √( (2DS) / (H) ) × √(p / (p - d))
Where:
- p = production rate per day = 600 tubs/day
- d = demand rate per day = 100 tubs/day
Calculations:
- The basic EOQ (as above) is approximately 2886 tubs.
- The production adjustment factor:
√(p / (p - d)) = √(600 / (600 - 100)) = √(600 / 500) = √1.2 ≈ 1.095
Thus, the EPQ is:
EPQ = 2886 × 1.095 ≈ 3164 tubs
This larger order quantity accounts for production overlap and reduces the need for frequent reordering, leading to lower ordering costs and optimized inventory levels.
Implications and Considerations
The computed EOQ of approximately 2886 tubs ensures minimizing combined ordering and holding costs for external procurement. The total annual fixed ordering costs and holding costs are roughly $520 and $519.48, respectively, indicating balanced cost management. Transitioning to in-house production with an EPQ of about 3164 tubs offers further efficiencies by reducing ordering frequencies and leveraging the higher production rate, which aligns with cost-saving initiatives.
However, the decision to switch also depends on factors such as capacity constraints, quality control, perishability, and investment costs. The lowered setup cost ($7.50) and reduced holding costs ($0.20 per tub annually) suggest significant potential savings, especially if Andronico’s can efficiently manage production without compromising freshness or quality standards.
Overall, applying EOQ and EPQ models provides strategic insights into optimal inventory levels, cost minimization, and operational efficiency, enabling Andronico’s to make data-driven decisions aligned with their financial goals in a competitive retail environment.
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