Question

Rocky Mountain Tire Center sells 8,000 go-cart tires per year. The ordering cost for each order is $35, and the holding cost is 50% of the purchase price of the tires per year. The purchase price is $24 per tire if fewer than 200 tires are ordered, $19 per tire if 200 or more, but fewer than 5,000 tires are ordered, and $13 per tire if 5,000 or more tires are ordered.

a. How many tires should Rocky Mountain order each time it places an order?

b. What is the total cost of this policy??

Answer 1

a. Since it is stated that Rocky Mountain Tyre Center sells 8000 tyres, it is a good idea to check if the cost of ordering 8000 tyres at once comes to a minimum as compared to other order quantities. You will notice that odering a bigger lot provides economic purchase rate and minimizes the ordering cost but may increase holding cost. However holding costs will add up more in case of smaller order quantities. Therefore 8000 tyres should be ordered in a single order. (answer to 'B' question will provide more clarity on this)

b. Total cost of this policy = (no of orders*ordering cost)+(order quantity*respective purchase rate*1.5)

Note: the purchase rate has been multiplied by 1.5 to include holding cost, which is 50% of the purchase rate.

Using a single order of 8000 tyres, we get :

total cost = (1*35)+(8000*13*1.5) = $156035

Any other order quantity will yield higher total cost.