Economic Order Quantity: Optimizing Napkin Orders for Your Restaurant
How can a restaurant determine the optimal order quantity for napkins to minimize costs?
Given that a restaurant currently uses 62,500 boxes of napkins each year at a constant daily rate, with an ordering cost of $200.00 per order and an annual carrying cost of $1.00 per box, what is the economic order quantity for napkins?
Answer:
Using the EOQ model and the provided data, the optimal order quantity for the restaurant to minimize both ordering and holding costs is 10,000 boxes of napkins.
The Economic Order Quantity (EOQ) refers to the optimal amount of an inventory item that a company should order to minimize both order and holding costs. The EOQ formula is √ [(2DS)/H], where D is the annual demand, S is the cost to place a single order, and H is the holding cost per unit.
In this case, the restaurant's annual demand (D) for napkins is 62,500 boxes, the order cost (S) is $200, and the holding cost (H) is $1. By inputting these values into the formula, we calculate √ [(2*62500*200)/1] = 10,000 boxes. Therefore, the Economic Order Quantity for this restaurant is 10,000 boxes.
By optimizing the order quantity to 10,000 boxes, the restaurant can effectively manage its inventory, reduce ordering costs, and minimize holding costs, leading to greater efficiency and cost savings in the long run.