Question

The operator of a concession at a downtown location estimates that he will sell 30 bags of circus peanuts during a month. Annual unit carrying cost is 25 percent of unit price and ordering cost is $22 per order. The price schedule for bags of peanuts is: 1 to 199, $1.00 each; 200 to 499, $.96 each; and 500 or more $.88 each. What order size would be most economical?

Note: Please use "sqrt" for square root in equations, such as sqrt(12 * 3 / 5).

Answer 1

DEMAND = 360

ORDERING COST = 22

HOLDING COST % = 25 %

EOQ = SQRT(2 * DEMAND * ORDERING COST / HOLDING COST)

ANNUAL HOLDING COST = ADJUSTED EOQ / 2 * HOLDING COST PER UNIT

ANNUAL ORDERING COST = (ANNUAL DEMAND / ADJUSTED EOQ) * ORDERING COST

ANNUAL MATERIAL COST = ANNUAL DEMAND * OFFERED PRICE PER UNIT

TOTAL COST OF INVENTORY = ANNUAL(HOLDING + ORDERING + MATERIAL)

OPTIMAL ORDER QUANTITY = 500

ASSOCIATED COST = 388

NO.	LOWER LIMIT	UPPER LIMIT	PER UNIT PRICE	ADJUSED HOLDING COST	EOQ	ADJUSTED QUANTITY	ANNUAL HOLDING COST	ANNUAL ORDER COST	ANNUAL MATERIAL COST	TOTAL COST OF INVENTORY
1	0	199	1	0.25	252	199	(199 / 2) * 0.25 = 24.88	360 / 199 * 22 = 39.8	360 * 1 = 360	24.88 + 39.8 + 360 = 425
2	200	499	0.96	0.24	257	257	(257 / 2) * 0.24 = 30.84	360 / 257 * 22 = 30.82	360 * 0.96 = 345.6	30.84 + 30.82 + 345.6 = 407
3	500	OR MORE	0.88	0.22	268	500	(500 / 2) * 0.22 = 55	360 / 500 * 22 = 15.84	360 * 0.88 = 316.8	55 + 15.84 + 316.8 = 388

**THE ANNUAL DEMAND SHOULD NOT BE LOWER THAN ORDER QUANTITY BRACKET.

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