Question

The purchasing manager of a local company is considering three sources of supply specially coated containers. Supplier A offers any quantity of container for $150 each. Supplier B offers in lots of 150or more at a price of $125 each. Supplier C offers containers in lots of 250 or more at a price of $100 each. The company requires 1,500 containers per annum.Ordering costs have been estimated at $400 per order, while carrying cost are 40% of unit price. Which supplier should be given the contract to supply the container?

Answer 1

USING EOQ

DEMAND = 1500
ORDERING COST = 400
HOLDING COST = 40
EOQ = SQRT(2 * ANNUAL DEMAND * ORDERING COST / HOLDING COST PER UNIT) = SQRT(2 * 1500 * 400 / 40) = 173

DEMAND = 1500
ORDERING COST = 400
HOLDING COST = 60
COST PER UNIT = 150

EOQ = SQRT(2 * ANNUAL DEMAND * ORDERING COST / HOLDING COST PER UNIT) = SQRT(2 * 1500 * 400 / 60) = 141

ANNUAL HOLDING COST = (EOQ / 2) * HOLDING COST PER UNIT = (141 / 2) * 60 = 4230

ANNUAL ORDERING COST = (DEMAND / EOQ) * ORDERING COST = (1500 / 141) * 400 = 4255.32

ANNUAL MATERIAL COST = ANNUAL DEMAND * PRICE PER UNIT = 1500 * 150 = 225000

TOTAL COST OF INVENTORY = ANNUAL HOLDING COST + ANNUAL ORDERING COST + ANNUAL MATERIAL COST = 4230 + 4255.32 + 225000 = 233485.32

USING LOT SIZE OF 150 UNITS

ANNUAL HOLDING COST = (150 / 2) * 50 = 3750
ANNUAL ORDERING COST = (1500 / 150) * 400 = 4000
TOTAL COST OF PURCHASING = 1500 * 125 = 187500
ANNUAL TOTAL COST = ANNUAL HOLDING COST + ANNUAL ORDERING COST + ANNUAL COST OF MATERIAL = 3750 + 4000 + 187500 = 195250

USING LOT SIZE OF 250 UNITS

ANNUAL HOLDING COST = (250 / 2) * 40 = 5000
ANNUAL ORDERING COST = (1500 / 250) * 400 = 2400
TOTAL COST OF PURCHASING = 1500 * 100 = 150000
ANNUAL TOTAL COST = ANNUAL HOLDING COST + ANNUAL ORDERING COST + ANNUAL COST OF MATERIAL = 5000 + 2400 + 150000 = 157400

2. SINCE ANNUAL HOLDING COST WITH LOT SIZE OF 250 IS LOWER, WE WILL CHOOSE SUPPLIER C

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