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Joe needs to purchase malt for his micro-brew production. His supplier charges $35 per delivery (no matter how much is delivered) and $1.20 per gallon. Joe’s annual holding cost per unit is 35% of the dollar value of the unit. Joe uses 5,000 gallons of malt per week. Assume Joe operates 52 weeks a year and zero lead time. Suppose Joe is considering making the malt in-house. He anticipates putting in a production process that can make 7,000 gallons of malt per week. The per-gallon cost if they make it in-house will remain at $1.20 per gallon. What is the largest reorder cost such that it will be cheaper for him to make the malt in-house?
Expert Answer
EOQ= ((2*Annual Demand*Cost per order)/Holding cost)1/2
Demand= 5000 gallons/week = 5000*52 = 260,000 gallons per year
Cost per order= 35$
Holding cost= .35*1.20= .42$ per year per gallon
EOQ= (2*260000*35/.42)1/2
= 6582.805 = 6583 units
