The WT Company needs to order a part from a supplier. The supplier has the following...

The WT Company needs to order a part from a supplier. The supplier has the following price schedule for the part. The parts cost $300 each for orders of 500 or fewer units; for orders between 500 and 1,000 units, the first 500 cost $300 each and the remaining amount cost $290 each; for quantities of 1,000 and over the first 500 cost $300 each, the next 500 cost $290 each, and the remaining amount cost $280 each. The accounting department estimates that the fixed cost of placing and order is $80, and holding costs are based on a 20% annual interest rate. Assuming a monthly demand rate of 150 units, what would be the optimal order quantity?

Expert Solution

Ordering cost = $80

Let Unit cost = $300

Holding cost = 20% of Unit cost = 0.20 x 300 = $60 per unit per year

Monthly demand = 150 Units

Annual demand = Monthly demand x 12 = 150 x 12 = 1800 Units

Optimal Order quantity = Economic order quantity

= EOQ = (2 x Annual Demand x Ordering cost) / Holding cost

= (2 x 1800 x 80) / 60

= 69.28 Units

keosha answered 2 years ago

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