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Chico's Chili uses 120 kg of ground beef per day. It currently orders beef once a week (840 kg order quantity). Calculating the economic order quantity (EOQ) shows Chico could save $146.17 annually by ordering 1363 kg each time instead of 840 kg. Switching to the EOQ would lower the total annual inventory cost from $1372.28 to $1226.11. The reorder point is 360 kg to account for the 3 day lead time.

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Nikhil Jolly
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28 views

Assignment #1

Chico's Chili uses 120 kg of ground beef per day. It currently orders beef once a week (840 kg order quantity). Calculating the economic order quantity (EOQ) shows Chico could save $146.17 annually by ordering 1363 kg each time instead of 840 kg. Switching to the EOQ would lower the total annual inventory cost from $1372.28 to $1226.11. The reorder point is 360 kg to account for the 3 day lead time.

Uploaded by

Nikhil Jolly
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Assignment # 1 MGMT 295 Materials Management

Your name: __Nikhil Jolly___


Your Student Number: _____10325399__

Chico’s Chili (CC) is well known for making the best chili in Chicago. Chico makes a
variety of different types of chili and customers can combine it together with any sides
they like. Chico’s chili is so popular that it uses about 120 kgs of ground beef per day
and he is open 348 days per year.

Chico has been ordering beef once per week and has determined that it takes a ½ hour
to place an order. His hourly rate is $40. Chico has also determined that inventory
spoilage is 1% and his interest rate on debt is 8%. Chico pays $10.00 per kg for his
ground beef. The lead time to place a beef order up to delivery is 3 days.

Chico has just learned about something called the EOQ and now thinks if he might be
able to save money by changing his order pattern. Please calculate the following:

1. Calculate how many kgs Chico purchases in a year (1/2 mark).

2. Calculate Chico’s current Order Quantity (1/2 mark).

3. What is the cost of placing one order? (1/2 mark)

4. What is the Carrying Cost of one kg of beef? (1/2 mark)

5. Calculate the current Total Annual Inventory Cost. (2 marks)

6. Calculate Chico’s economic order quantity (EOQ). (2 marks)

7. Using the EOQ, recalculate the Total Inventory Annual Costs. (2 marks)

8. What is the annual cost savings if Chico switches to ordering using the EOQ? (1
mark)

9. What is the inventory reorder point? (1 mark)

Answer

1. Daily usage = 120kgs


Working days = 348 days
Total annual purchase R = 120kgs/day x 348 days/year = 41760 kgs/year

2. Chico orders beef once per week.


Current order Quantity Q = 120kgs/day x 7 = 840 kgs/order.
3. Time taken to place one order = 0.5 hour
Hourly rate = $40
Cost of placing one order A = Time taken X Hourly rate = 0.5 x 40
= $20 per order

4. Inventory Spoilage = 1%, Interest rate = 8%


W = 1+8 = 9% = 0.09
Ground beef rate per kg, V = $10
Carrying cost per year, S = V x W = 10 x 0.09 = $0.90 per kg

5. Total Annual Inventory Cost = Annual Inventory Carrying Cost + Annual Ordering
Cost
TAC = ((Q/2) x S) + ((R/Q) x A)
= ((840/2) x 0.90) + ((41760/840) x 20)
= 378 + 994.28 = $1372.28

6. Chico’s EOQ = SQRT (2AR/S) = SQRT ((2 X 20 X 41760) / 0.90)


= SQRT (1670400 / 0.90) = SQRT (1856000)
EOQ = 1362.35 = 1363 kg

7. Recalculating Total Annual Inventory Cost, where EOQ = Q = 1363


TAC = ((Q/2) x S) + ((R/Q) x A)
= ((1363/2) x 0.90) + ((41760/1363) x 20)
= (613.35 + 612.76) = $1226.11
TAC = $1226.11

8. Annual cost savings if Chico switches to ordering using EOQ.


Annual cost savings = Total Annual cost at present – Total annual cost when
Q = EOQ
= $1372.28 - $1226.11 = $146.17.

9. Given lead time = 3 days


Reorder point, ROP = Daily usage x lead time
= 120 x 3
= 360 kgs.

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