Question

In: Operations Management

Bob oversees purchasing surgical supplies for a Hospital. Sam is evaluating scalpels for the hospital's surgical...

Bob oversees purchasing surgical supplies for a Hospital. Sam is evaluating scalpels for the hospital's surgical use. The quantity—price schedules for X is given in the following table. The annual demand for scalpels is 10,000 units. The ordering cost is $150 per order and the annual carrying cost is $1.95 per unit.

X

Quantity Ordered

Price per unit (in U.S. dollars)

0 to 2,999

10.00

3,000 to 4,999

9.75

5,000 to 7,999

9.25

8,000+

9.00


What is the economic order quantity that should be ordered from X?

Solutions

Expert Solution

Annual demand, D = 10,000 units

The ordering cost, S = $150 per order

Annual carrying cost, H = $1.95 per unit

EOQ = sqrt(2DS/H)

= sqrt(2*10000*150/1.95)

= 1240 units

For this quantity, unit price, c = $ 10

Total annual cost = Purchase cost + Ordering cost + Carrying cost

= D*c+S*D/Q+H*Q/2

= 10000*10+150*10000/1240+1.95*1240/2

= $ 102,419

--------------------------------------------

For unit price, c = $ 9.75, MOQ = 3000 units

Total annual cost = 10000*9.75+150*10000/3000+1.95*3000/2

= $ 100,925

--------------------------------------------

For unit price, c = $ 9.25, MOQ = 5000 units

Total annual cost = 10000*9.25+150*10000/5000+1.95*5000/2

= $ 97,675

--------------------------------------------

For unit price, c = $ 9.00, MOQ = 8000 units

Total annual cost = 10000*9.00+150*10000/8000+1.95*8000/2

= $ 97,987.5

--------------------------------------------

Lowest total annual cost is $ 97,675 for order quantity of 5000 units

Therefore, economic order quantity that should be order from McKesson = 5,000 units

keosha answered 1 year ago
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