Question

M. P. VanOyen Manufacturing has gone out on bid for a regulator component. Expected demand is

700700

units per month. The item can be purchased from either Allen Manufacturing or Baker Manufacturing. Their price lists are shown in the table. Ordering cost is

​$5555​,

and annual holding cost per unit is

​$66.

                                                                                      

                                                    

  

Allen Mfg.		Baker Mfg.
Quantity	Unit Price	Quantity	Unit Price
​1-499	​$16.00	​1-399	​$16.10
​500-999	15.50	​400-799	15.60
​1000+	15.00	​800+	15.10

​a) What is the economic order quantity if price is not a​ consideration?

nothing

units

b) which supplier should be used?

c) what is the optimal order quantity?

d) total cost?

Answer 1

DEMAND = 700

ORDERING COST = 55

HOLDING COST = 6

EOQ = SQRT(2 * DEMAND * ORDERING COST / HOLDING COST) = SQRT(2 * 700 * 55 / 6) = 113

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)

EOQ = SQRT(2 * 700 * 55 / 6) = 113

FOR ALLEN MFG

NO.	LOWER LIMIT	UPPER LIMIT	PER UNIT PRICE	HOLDING COST	EOQ	ADJUSTED QUANTITY	ANNUAL HOLDING COST	ANNUAL ORDER COST	ANNUAL MATERIAL COST	TOTAL COST OF INVENTORY
1	0	499	16	6	113	113	113 / 2 = 339	700 / 113 * 55 = 340.71	700 * 16 = 11200	339 + 340.71 + 11200 = 11880
2	500	999	15.5	6	113	500	500 / 2 = 1500	700 / 500 * 55 = 77	700 * 15.5 = 10850	1500 + 77 + 10850 = 12427
3	1000	& more	15	6	113	1000	1000 / 2 = 3000	700 / 1000 * 55 = 38.5	700 * 15 = 10500	3000 + 38.5 + 10500 = 13539

OPTIMAL ORDER QUANTITY = 113

ASSOCIATED COST = 11880

FOR BAKER MFG

NO.	LOWER LIMIT	UPPER LIMIT	PER UNIT PRICE	HOLDING COST	EOQ	ADJUSTED QUANTITY	ANNUAL HOLDING COST	ANNUAL ORDER COST	ANNUAL MATERIAL COST	TOTAL COST OF INVENTORY
1	0	399	16.1	6	113	113	113 / 2 = 339	700 / 113 * 55 = 340.71	700 * 16.1 = 11270.	339 + 340.71 + 11270 = 11950
2	400	799	15.6	6	113	400	400 / 2 = 1200	700 / 400 * 55 = 96.25	700 * 15.6 = 10920	1200 + 96.25 + 10920 = 12216
3	800	& more	15.1	6	113	800	800 / 2 = 2400	700 / 800 * 55 = 48.13	700 * 15.1 = 10570	2400 + 48.13 + 10570 = 13018

OPTIMAL ORDER QUANTITY = 113

ASSOCIATED COST = 11950

2. ALLEN MFG IS THE BETTER CHOICE

3. ORDER QUANTITY = 113 UNITS

4. ANNUAL TOTAL COST = 11880