Question

Emery Pharmaceutical uses an unstable chemical compound that must be kept in an environment where both temperature and humidity can be controlled. Emery uses 775 pounds per month of the​ chemical, estimates the holding cost to be 50​% of the purchase price​ (because of​ spoilage), and estimates order costs to be ​$48 per order. The cost schedules of two suppliers are as​ follows:                                                                                                                Vendor 1 Vendor 2   Quantity ​Price/lb   Quantity ​Price/lb ​ 1-499 ​$17.00 ​ 1-399 ​$17.10 ​ 500-999 ​$16.75 ​ 400-799 ​$16.85 ​ 1,000+ ​$16.50 ​ 800-1,199 ​$16.60 ​ 1,200+ ​$16.25 This exercise contains only parts​ a, b, and c. ​a) What is the economic order quantity for each​ supplier? For Vendor 1 at ​$17.00​/pound, the economic order quantity is

Answer 1

[Ch] Holding Cost = 50% of the Unit purchase price per unit per Year,

[Co]Ordering Cost = USD 48 per Order,

[D]Annual Demand =775*12=9300

Vendor 1	Quantity ​Price/lb	Vendor 2	Quantity ​Price/lb
1-499	17	1-399	17.1
500-999	16.75	400-799	16.85
1000+	16.5	800-1199	16.6
		1200+	16.25

a)

For Vendor 1,

Formula for Economic Order Quantity = Square Root of [( 2 X D X Co)/ Ch],

Or, Economic Order Quantity = Square Root of [(2 X 9300 X 48 )/ (0.50 X17 )]

Or, Economic Order Quantity = Square Root of [105035.3] = 324.0915

Here, considering all the purchase cost, we can find that Economic Order Quantity comes in between 1-499, so, we should consider purchase cost of $17/pound

Hence, Economic Order Quantity for vendor 1 or supplier 1 = 324.0915= 324(Rounded to nearest whole number)

b)

For Vendor 2,

Formula for Economic Order Quantity = Square Root of [( 2 X D X Co)/ Ch],

Or, Economic Order Quantity = Square Root of [(2 X 9300 X 48 )/ (0.50 X17.10 )]

Or, Economic Order Quantity = Square Root of [104421.10] = 323.1425

Here, considering all the purchase cost, we can find that Economic Order Quantity comes in between 1-399, so, we should consider purchase cost of $17.10/pound

Hence, Economic Order Quantity for vendor 2 or supplier 2 = 323.1425=323(Rounded to nearest whole number)