ECONOMIC ORDER QUANTITY (EOQ)

Name

Institution

Date

1.Economic bottling quantity for the bulk wine

It is important to note that in calculating this value, the Economic order Quantity model will be applicable and the resulting outcome will be important in making the right decisions regarding the inventory level (Anderson, 2012). In this case, F and M Hotels and Spas need 2016 volumes of bulk wines per year. The cost of purchasing each wine is €25. Ordering cost is €450 per order. Carrying cost is 18% of per unit cost. Lead time is a half a day. This hotel operates for 365 days per year.

EOQ = (2 x D x S)/H

Where in this case

D = 2016

S = €450

C = €25

I = 18%

H = CxI

H = 4.5

EOQ = (2x 2016 x 450)/4.5

EOQ = 634.98

The economic bottling quantity for the bulk wine becomes 634.98 Liters

2. The purchase order quantity for the bottled wines

This is estimated as the average of the total quantity estimated in the preceding question. Arithmetically this can be calculated as Q/EOQ.

This gives a purchase order quantity of 2016/634.98 and this gives 3.17 liters.

In other words, based on economic order quantity model, 3.71 liters will be the annual purchase order for each wine.

3. The average stock for each wine.

In this case it is important to note that the results will form the basis of making a decision on what to purchase the type of wine that would not be favorable to the profit motive of the firm.

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From the Excel data provided it is very evident that the average is relatively realistic around the totals at 54.05

It is important to note that the various wines are almost close in terms of costs and preferences and this explains the diversification in terms.

The table below shows the trend in the production of the various wines for the consumptions in the hotel.

2009 2010 2011

Grenache

110

82 101

Mourvedre

122

79 110

Syrah

45 38 44

Counoise

31 24 29

Total

308

223 284

This trend if graphically resented in the table will give the following graphs.

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From the above drawn table, it is realized that the trend is consistent and fairly close to each other.The movement in this table shows a close competition among the variety of wines brands and this explains the reason behind the blend by the hotel to the guests.

Average stock investments over the years.

This can be represented graphically as EOQ/2

634.98/2 = 317.49 liters.

5. Observations of the suitability of EOQ.

Economic order quantity gives the actual forecast of the storage and production capacity of a firm. It is based on some assumptions that are important in giving the realistic values that could be used for predicting the carrying and production capacity of the firm.

In conclusion, the firm’s management needs to choose an optimal quantity taking into consideration the costs of production, storage and transport. This requires strategic planning and sound understanding of managerial economics.

References

Anderson, D. R. (2012). An introduction to management science: Quantitative approaches to decision making. Mason, Ohio: South-Western/Cengage Learning.