Question

Mac-in-the-Box sells computer equipment by mail and telephone order. Mac sells 2,400 flat-bed scanners per year. Ordering cost is $300 and the annual holding cost is 25 percent of the item’s price. There are 300 working days in the year and the lead time is 3 days. The scanner manufacturer offers the following price structure to Mac-in-the Box:

Order Quantity	Price per Unit
1 to 199	$520.00
200 to 499	$515.00
500 or more	$512.00

Given the above information and basing your decision on the economics, what order quantity do you recommend that Mac order from the scanner manufacturer? Why?

What is the low cost for each of the three Price per Unit options?

For the optimal order quantity, what is the inventory position immediately after an order is placed?

Answer 1

Economic Order Quanitity= Square root of ( 2* Order Cost* Annual Demand/Annual unit holding Cost)
Item Qunatity	Price( $/Unit)	Annual Unit Holding Cost, Ch ( 25% of Price /Unit)	EOQ
1-100	$520.00	$130.00	105
200-499	$515.00	$128.75	106
500 or more	$512.00	$128.00	106
No. of Quanity Show in range of Item Quantity second and third coloumn are substential more as compare with Economic order quantity. Hence, Correct EOQ will be 105
At EOQ level, Annual Ordering Cost plus annual holding cost will be minimum
Item Qunatity	Price( $/Unit)	Annual Unit Holding Cost, Ch ( 25% of Price /Unit)	Ordering Cost	No. of Order	Annual Ordering Cost	Annual Inventory holding cost	Annual Procurement Cost	Total Cost
EOQ       105	$520.00	$130.00	$300.00	22.86	$6,857.14	$6,825.00	$54,600.00	$68,282.14
200	$515.00	$128.75	$300.00	12	$3,600.00	$12,875.00	$54,075.00	$70,550.00
500	$512.00	$128.00	$300.00	4.8	$1,440.00	$32,000.00	$53,760.00	$87,200.00
As shown in above tabel Annual toal cost are minimum at EOQ level-105 Quanity as compare with other level. Hence, it will be recommended.