Now the supplier is offering Omni a quantity discount of 5% for orders over 1500 units and 10% for order over 6000 units.

Now the supplier is offering Omni a quantity discount of 5% for orders over 1500 units and 10% for order over 6000 units. Omni currently orders 1,000 units 5 times a year to meet annual demand. Omni’s current cost is $3.00, and the selling price is $4.95. The order cost is $42 per unit and annual holding cost is $25%.

Based on the new discount policy, what is the best strategy for the purchasing manager to follow.

Expert Solution

Answer: Order policy of 1500 units is the best

explanation:

Annual demand, D=	1000*5 orders	5000	5000	5000
Order cost or setup cost, S		$42.00	$42.00	$42.00
item cost		$3.00	(1-0.05)*$3= $2.85	(1-0.10)*$3= $2.70
holding cost percent		25%	25.0%	25.0%
holding cost per year, H=	holding cost percent*item cost	$0.75	$0.71	$0.68
Order quantity, Q=		*squareroot(2SD/H)=* 748	1500	6000
#orders per year =	D/Q	6.68	3.33	0.83
Average inventory=	Q/2	374.17	750.00	3000.00
annual holding cost=	Q*H/2	$281	$534	$2,025
Annual ordering cost=	D*S/Q	$281	$140	$35
Purchasing cost=	annual demand*item cost	$15,000	$14,250	$13,500
Total cost=	holding cost+order cost+purchase cost	$15,561	$14,924	$15,560

order policy of 1500 units has the least total cost

keosha answered 2 years ago

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