Here following information is known :
Cost of Malt per gallon = USD 1.2
Inventory holding cost = 35% of the dollar value of the unit = 1.2 X 35 /100 = 0.42 USD per gallon
Weekly Requirement of Malt = 5000 gallons
Total number of weeks in a year = 52 weeks
Annual requirement of Malt = 5000 X 52 = 260000 gallons
Order cost in the question is not given we are assuming 35 USD given in the question as delivery charge as Ordering cost.
So ordering cost = 35 USD
Now economic order quantity is given by the formula
EOQ = Square root of (2 X Annual Quantity X Cost per order) / (Inventory Holding Cost per unit per annum)
= Square root of ( 2 X 260000 X 35)/( 0.42) = 6582.8 gallons = 6583 gallons
In the question it is given that the supplier is not accepting orders if it is not in 1000 gallons . So based upon this we are rounding off the order quantity from 6583 gallons to 7000 gallons.
Total number of orders to be placed in the year = 260000 / 7000 = 37.14 = 37 orders
Cycle length = Total number of weeks / Total number of orders = 52 / 37 = 1.4 week
So ordering should be every 1.4 week and assuming production is running 7 days a week order should be placed on every 10th day.
If the lead time from supplier is 2 weeks then re order level will be = Weekly requirement in Gallons X 2
= 5000 X 2 = 10000 gallons
If we assume that in the begining of the year Stock is 0 our first order should be = 7000 + 10000 = 17000 gallons
After this 1st order for 17000 gallons all subsequent orders should be placed for 7000 gallons.
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