Bel Computers purchases integrated Chip Manufacturing, Inc, decides to offer pri
ID: 358420 • Letter: B
Question
Bel Computers purchases integrated Chip Manufacturing, Inc, decides to offer price concessions in order to attract larger onders. The price structure is shown below chips at $350 per chip. The holding cost is $36 par unit per year, the ordering cost is $121 per arder, and sales are steady at 400 per month. The company's supplier, Rich Blue Rich Blue Chip's Price Structure $350 325 $300 100-199 units w he t ver garty and the minimt for bl Cues to order purchase, arnd hols theue rlegraled s,uning the datsu dhos provioled, and using a faed The most oost-offective order quanity (assuming they take the most coet-offective dscount, and use a fiked holding cot)units (er your response as a whole number the chosen level of quantity dscount, and using the fxed holding cost, what is the total arnual cost for Bell omputers to order, purchase, and hold the integrated chips:(round your response to the holding cost nearest whole number b)Bea Computers wishes to recalculate using a 10% holdrgcost rather than the fixed S36hldngcost in part a whatste most ostenectve odu aur tey and what is te corosprdnganual coun Enter your answer in each of the answer boxesExplanation / Answer
To be calculated:
Economic Order Quantity (EOQ)
Total Annual Cost
Given values:
Cost of chip, C = $350
Holding Cost, H = $36 per unit per year
Cost of ordering, Co = $121 per order
Monthly demand = 400 per month
Annual demand, D = 400 x 12 = 4800 units
Solution:
(a) Economic Order Quantity (EOQ) is calculated as;
EOQ = Square root of (2 x D x Co) / H
Where,
EOQ = Economic Order Quantity
D = Annual demand
Co = Cost of ordering
H = Holding Cost
Putting the given values in the above formula, we get;
EOQ = SQRT (2 x D x Co) / H
EOQ = SQRT (2 x 4800 x 121) / 36
EOQ = SQRT (32266.67)
EOQ = 179.63 or 180
Economic order quantity (EOQ) = 180 units
Total Annual Cost is calculated as;
Total cost (TC) = Actual purchasing cost + Total holding cost + Total ordering cost
Total cost (TC) = (D x C) + (EOQ x H)/2 + (D x Co)/EOQ
where,
D = Annual demand
C = Discounted cost against the economic order quantity
H = Holding cost
Co = Ordering cost
EOQ = Economic order quantity
Putting the given values in the above formula, we get;
Total cost (TC) = (D x C) + (EOQ x H)/2 + (D x Co)/EOQ
For EOQ = 180 units, applicable price as per the given price structure = $325
Total cost (TC) = (4800 x $325) + (180 x 36)/2 + (4800 x 121)/180
Total cost (TC) = $1,560,000 + $3,240 + $3,226.67
Total cost (TC) = $1,566,466.67
Total cost (TC) = $1,566,467
(b) Holding cost = 10% of applicable price;
For order quantity 1-99 units:
Price/unit = $350
Holding cost, H1 = 10% of 350 = $35
Economic Order Quantity (EOQ) is calculated as;
EOQ = SQRT (2 x D x Co) / H1
EOQ = SQRT (2 x 4800 x 121) / 35
EOQ = SQRT (33188.57)
EOQ = 182.18 or 182
EOQ = 182 units
For order quantity 100-199 units:
Price/unit = $325
Holding cost, H2 = 10% of 325 = $32.5
Economic Order Quantity (EOQ) is calculated as;
EOQ = SQRT (2 x D x Co) / H2
EOQ = SQRT (2 x 4800 x 121) / 32.5
EOQ = SQRT (35741.54)
EOQ = 189.05 or 189
EOQ = 189 units
For order quantity 200 or more units:
Price/unit = $300
Holding cost, H3 = 10% of 300 = $30
Economic Order Quantity (EOQ) is calculated as;
EOQ = SQRT (2 x D x Co) / H2
EOQ = SQRT (2 x 4800 x 121) / 30
EOQ = SQRT (38720)
EOQ = 196.77 or 197
EOQ = 197 units
Only for order quantity of 100-199 units, the EOQ falls within the applicable quantity slab, therefore,
Economic order quantity (EOQ) = 189 units
Total Annual Cost is calculated as;
Total cost (TC) = Actual purchasing cost + Total holding cost + Total ordering cost
Total cost (TC) = (D x C) + (EOQ x H)/2 + (D x Co)/EOQ
Total cost (TC) = (4800 x 325) + (189 x 32.5)/2 + (4800 x 121)/189
Total cost (TC) = $1,560,000 + $3071.25 + $3073.02
Total cost (TC) = $1,566,144.27
Total cost (TC) = $1,566,144
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