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David’s Delicatessen flies in Hebrew National salamis regularly to satisfy a growing demand in Silicon Valley. The owner, David Gold, estimates a steady demand of 175 salamis per month. Each salami costs Gold $1.85. The fixed cost of calling his brother in New York and having the salamis flown in is $200. It takes three weeks to receive an order. Gold’s accountant, Irving Wu, recommends a holding cost of 27 percent, including cost of capital, cost of shelf space, and cost of taxes and insurance.

a. How many salamis should Gold have flown in, and how often should he order them?

b. How many salamis should Gold have on hand when he phones his brother to send another shipment?

c. Suppose the salamis sell for $3 each. Are these salamis a profitable item for Gold? If so, what annual profit can he expect to realize from this item? (Assume that he operates the system optimally.)

Answer :

Using the EOQ formula, David Gold can determine the optimal order quantity and frequency. By considering the lead time and adding safety stock, he can decide on the desired stock level. Lastly, comparing total revenue and total cost will determine if the salamis are profitable for Gold.

To determine how many salamis David Gold should have flown in and how often he should order them, we need to consider the steady demand, cost of salamis, fixed cost, and holding cost.

a. To calculate the optimal order quantity, we can use the Economic Order Quantity (EOQ) formula: EOQ = sqrt((2DS)/(H)), where D is the demand per month (175 salamis), S is the cost per salami ($1.85), and H is the holding cost as a percentage (27%). By substituting the values into the formula, we can find the optimal order quantity.

To calculate the order frequency, we can use the formula: Order frequency = (Demand per month / EOQ).

b. To determine the number of salamis to have on hand when ordering, we need to consider the lead time, which is three weeks in this case. Multiplying the weekly demand by the lead time, we get the safety stock. Adding the safety stock to the EOQ will give us the desired stock level when ordering.

c. To determine the profitability, we need to calculate the total revenue and total cost. Total revenue is the selling price ($3) multiplied by the demand per month (175). Total cost includes the cost of salamis, fixed cost, and holding cost. Subtracting the total cost from the total revenue will give us the annual profit.

In conclusion, using the EOQ formula, David Gold can determine the optimal order quantity and frequency. By considering the lead time and adding safety stock, he can decide on the desired stock level. Lastly, comparing total revenue and total cost will determine if the salamis are profitable for Gold.

To know more about EOQ formula visit:

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