Question

In: Advanced Math

Sorur Inc. has gone out on bid for an electronic component. Expected demand is 500 units...

  1. Sorur Inc. has gone out on bid for an electronic component. Expected demand is 500 units per month. The item can be purchased from either Asha Manufacturing or Brian Manufacturing. Their price schedule is shown below. Ordering cost is $25, and annual holding cost per unit is $15.

Ahsa Mfg.                                                           Brian Mfg.  

Quantity              Price/unit                           Quantity              Price/unit

1- 199                    $20.00                                   1 – 299                 $20.00

200 – 399             $19.80                                   300 – 599             $19.75

400+                      $19.60                                   600+                      $19.50

What is the optimal order quantity? Which supplier should be used?

Solutions

Expert Solution

Monthly demand = 500 units

Yearly demand = 500 x 12 = 6000 Units

Ordering cost = $25

Holding cost = $15 per unit per year

Optimal Order quantity = EOQ = Sqrt [(2 x Annual demand x Ordering cost) / Holding cost]

= Sqrt [(2 x 6000 x 25) / 15]

= 141.42 Units (Approx.)

Number of orders per year = Annual demand / EOQ

= 6000 / 141.42          

= 42.43 orders (Approx.)

Annual Ordering cost = No of orders per year x Per order cost

= 42.43 x 25 = $1060.75

Average annual inventory = 141.42 / 2 = 70.71 Units (Approx.)

Annual Holding cost = Average annual inventory x Holding cost per unit per year

= 70.71 x 15

= $1060.65

CASE 1: ASHA MANUFACTURING

Purchase price = $20

Total cost of purchasing = Annual demand x price per unit

= 6000 x 20

= $120,000

Total Annual cost = Total cost of purchasing + Annual holding cost + Annual ordering cost

= 120,000 + 1060.75 + 1060.65

= $122121.40

CASE 2: BRIAN MANUFACTURING

Purchase price = $20

Total cost of purchasing = Annual demand x price per unit

= 6000 x 20

= $120,000

Total Annual cost = Total cost of purchasing + Annual holding cost + Annual ordering cost

= 120,000 + 1060.75 + 1060.65

= $122121.40

Both Brian and Asha Manufacturing have the same total cost. Either of them can be chosen


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