Problem 2: Quantity Discounts (5 points) The Verizon store plans to order the ne

Question

Problem 2: Quantity Discounts (5 points) The Verizon store plans to order the newest iPhone from Apple. The demand for this newest iPhone is expected to be 7,225 per year. There is a $400 charge for placing an order and the store estimates an $800 cost per unit to hold it in inventoryfor the year. a) What is the economic order quantity? (2 points) For part b) assume prices for the new iPhone are based on the quantity purchased at one time, so if less than 100 are ordered, the unit price is $1000; if 100 to 399 are ordered, the unit price is $990; and if 400 or more are ordered, the unit price is $980. b) What order quantity will result in the lowest total annual cost for the Verizon store? show your work for full credit. (3 points) Be sure to

Explanation / Answer

TheVerizone Store a) Economic Order Quntity =Sqrt((2*Annual Demand*ordering cost)/Carrying Cost) =Sqrt((2*7225*400)/800) 85 Total Inventory cost at EOQ = =85*400+85*800 = 102000 Units (A) No. of orders during the year(B) Ordering cost(B*400)( C) Carrying cost(A*800)(D) Discount (1000-Price offered)(E) Total Inventory Cost(C+D-E) b) 99 73 29192 79200 0 108392 100 72 28900 80000 1000 107900 399 18 7243 319200 3990 322453 400 18 7225 320000 8000 319225 It can be seen from above analysis that Total Inventory cost is minimum when EOQ quantity is ordered i.e. 85 Units. Any order above 85 units will attracts higher inventory cost.

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