Question

M. P. Van Oyen Manufacturing has gone out on bid for a regulator component. Expected demand is 675 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 $50, and annual holding cost per unit is $7. 

    

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? _______ units (round your response to the nearest whole number). 

b) Which supplier, based on all options with regard to discounts, should be used? _______ 

c) What is the optimal order quantity and total annual cost of ordering, purchasing, and holding the component? 

The optimal order quantity is _______ with a total cost of $_______  (round your responses to the nearest whole number).

Answer 1

economic order quantity (EOQ) is the square root of [(2 times the annual demand in units times the incremental cost to process an order) divided by (the incremental annual cost to carry one unit in inventory)]

i.e [2 x (Annual demand x cost per order) / Annual Carrying Cost per Unit]^(1/2)

Annula demand = 675 x 12 = 8,100 units

answer:

a) EOQ = [2 x(8100 x 50)/7]^1/2

= 340 units.

b) Allen Mfg is the best supplier considering the discount.

c) total cost = total order cost + Purchase cost + Holding cost.

for 340 units total 24 orders would be required to give 8,160 units.

Total cost = (24x50)+(8,160x15.50)+(340*7)

= 1200 + 126,480 + 2380 = $130,060.