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Step 1: Economic Order Quantity (EOQ)

The benefit of an organization spending time calculating EOQ is that it reduces inventory expenses and, as a result, strives to be as efficient as feasible. This formula may be used by a business to determine when an order should be placed and how much should be ordered so that the firm can continue regular production while minimizing inventory expenditures.

EOQ is an incredibly useful tool for managers since it allows them to determine the appropriate quantity of inventory to have on hand as well as when to purchase an additional product because new sales should be produced.

Given,

The restaurant

Annual Demand (A) = 100 50 = 5,000 bottles

Ordering Cost (O) = $10

Purchase cost = $ 3

Holding cost ( H) = 20% of $3

$$\begin{gathered} \mathrm{EOQ}=\sqrt{\frac{2×\mathrm{A}×\mathrm{O}}{\mathrm{H}}} \\ \mathrm{Where}, \\ \mathrm{A}=\mathrm{Annual}\mathrm{Demand} \\ \mathrm{O}=\mathrm{Ordering}\mathrm{Cost}\mathrm{Per}\mathrm{unit} \\ \mathrm{H}=\mathrm{Carrying}\mathrm{cost}\mathrm{Per}\mathrm{unit} \end{gathered}$$

$$\begin{gathered} =\frac{20}{100}×3 \\ =0.6 \end{gathered}$$

$$\begin{gathered} EOQ=\sqrt{\frac{2×A×O}{C}} \\ =\sqrt{\frac{2×5,000×10}{0.60}} \\ =480units. \end{gathered}$$

So, the Economic Order Quantity (EOQ) is 480 units .

Given,

Annual demand = 5,000 units

No. of operating weeks in a year = 50 weeks

Lead time = 3 weeks

Average daily usage or demand =?

Calculation of Average daily usage or demand

$$\begin{gathered} \mathrm{Average}\mathrm{daily}\mathrm{usage}=\frac{\mathrm{Annual}\mathrm{Demand}}{\mathrm{No}.\mathrm{of}\mathrm{operating}\mathrm{weeks}\mathrm{in}\mathrm{a}\mathrm{year}} \\ =\frac{5000}{50} \\ =100\mathrm{units} \\ \mathrm{Reorder}\mathrm{level}=\mathrm{Average}\mathrm{Daily}\mathrm{usage}×\mathrm{lead}\mathrm{time} \\ =\left(100\mathrm{units}×3\mathrm{weeks}\right) \\ =300\mathrm{units} \end{gathered}$$

So, the reorder level is 300 units.