Reference no: EM132200107
1. A major brewery in Ontario requires hops for its beers. The hops are purchased in bales of 90kg each. Each bale, which costs $1,000, can make 6,500 litres of beer on average, and the brewery makes 6,500,000 litres of beer per year. The brewery incurs an average of $50 in processing costs per order of bales, and $100 per year per bale in holding costs. For this question, assume that an EOQ model is to be adopted.
a) Calculate the EOQ (economic number of bales of hops to order) for this scenario.
b) Calculate the average inventory on hand, at the EOQ level.
c) Calculate the number of orders per year, at the EOQ level.
d) Calculate the total annual ordering and holding costs, together, at the EOQ level.
e) Describe the effect of increasing the ordering costs on the value of EOQ.
2. Now let’s revisit our brewery some time later, which has created a feature fruit beer with an annual demand of 1,000,000 litres (the production rate is 2,000,000 litres per year). The beer is produced in 10 litre cases in special variable-capacity vats that can brew the beer quickly if needed (that is, assume it’s produced like making bread). Assume that to produce a run of cases requires a setup cost of $500, and the holding cost for a case of beer is $5 per year (also ignore for the moment that it is perishable). The owners operate the brewery for 320 days per year.
a. How many cases should be produced in each run of production? Do not round until you reach your final answer.
b. Using your answer from part (a), calculate the new average inventory on hand. Do not round your answer.
c. Calculate an approximate length for a run of production, in days (do not round your answer). How many runs are there per year (round to 2 decimal places)?
d. If the brewery became more efficient at setup and reduced the setup cost to $300, calculate the new optimal number of cases per run and determine the total cost savings in a year. Provide each total cost, rounded to 2 decimal places.
3. Now let’s assume the brewery makes a very special, highly perishable fruit beer that only lasts one day once it is put into a keg. This beer is served in a popular beer garden, and it has become a novelty attraction. Because it is so perishable, the owners have asked you to help them determine how many pints they should aim to produce for each day (and thus arrange for the right size kegs). Any leftover beer at the end of the night is assumed to be worthless. Each pint sells for $7. Labour, overhead, fruit, and all other cost of production sums to $3.00 per pint. Based on extensive market research and pilot runs, you determine that average demand is 350 pints per day, with a standard deviation of 45 pints per day. What daily order quantity is optimal, in pints?