In: Operations Management
Rocky Mountain Tire Center sells 12,000 go-cart tires per year. The ordering cost for each order is $35, and the holding cost is 30% of the purchase price of the tires per year. The purchase price is $20 per tire if fewer than 200 tires are ordered, $16 per tire if 200 or more, but fewer than 5,000, tires are ordered, and $14 per tire if 5,000 or more tires are ordered.
a) How many tires should Rocky Mountain order each time it places an order? Rocky Mountain's optimal order quantity is ___units (enter your response as a whole number).
b) What is the total cost of this policy?
Annual demand(D) = 12000 tires
Ordering cost (S) =$35
Holding cost(H) = 30% of purchase price
Order size Price per unit Holding cost(30% of price per unit)
0-200 20 6
200-5000 16 4.8
5000 or more 14 4.2
First find the minimum point for each price starting with the lowest price until feasible minimum point is located.This means until a minimum point falls in the quantity range for its price
Minimum point for price of $14 = Sqrt of (2DS/H)=Sqrt of [(2X12000X35)/4.2] = sqrt of 200000 = 447 tyres.Because an order size of 447 tyres will cost $16 rather than $14, 447 is not a minimum feasible point for $14 per unit.
Minimum point for price of $16 = Sqrt of (2DS/H) =Sqrt of [(2X12000X35)/4.8]= sqrt of 175000 = 418 tyres.This is feasible as it falls in the $16 per tyre range of 200-5000
Now the total cost for 418 tyres is computed and compred to the total cost of the minimum quantity needed to obtain price of $14 per tyre
Total cost for Q=418 is (Q/2)H + (D/Q)S + (PriceXD)
= [(418/2)4.8] + [(12000/418)35] + (16X12000)
= 1003.2 + 1004.78 + 192000
= $194007.98
The minimum quantity needed to obtain a price of $14 is 5000 units.So with order quantity(Q) = 5000 units,
Total cost = (Q/2)H + (D/Q)S + (PriceXD)
= [(5000/2)4.2] + [(12000/5000)35] + (14 x 12000)
= 10500 + 84 + 168000
= $178584
a) So Rocky mountain's optimal order quantity is 5000 units as it has the lowest total cost.so they should order 5000 tires each time
b) The total cost of ordering optimal order is $178584