M. P VanOyen Manufacturing has gone out on bid for a regulator component. Expect
ID: 367718 • Letter: M
Question
M. P VanOyen Manufacturing has gone out on bid for a regulator component. Expected demand is 675 units per month. The item can be purchased from either Allen Manufacturing or Baker Manufacturing. Their price lists are shown in the table. Ordering cost is $45, and annual holding cost per unit is $6. Allen Mf Baker Mf Quantit 1-499 500-999 1000+ Unit Price S16.00 15.50 15.00 Quantit 1-399 400-799 800+ Unit Price $16.10 15.60 15.10 a) What is the economic order quantity if price is not a consideration?units (round your response to the nearest whole number) Learning Objective 12.7, Concept Question 7.1Explanation / Answer
Given Demand D = 700*12 = 8,400 units per year
Ordering cost S = $50
Holding cost H = $6
a) Economic order quantity EOQ
EOQ = 374.16 or 374 units
b) To answer this we have to calculate total cost at 374 units ,500 units , 1000 units for vendor Allen and total cost at 374 units, 400 units and 800 units for baker
Total cost = Purchase cost + Annual Holding cost + Annual Ordering cost
Total cost = Price *D + (Q/2)H + (D/Q)S
allen:
at Q =374 Total cost = 16*8400 + (374/2)6 + (8400/374)50 = 134400 + 1122+1122.995 =$136644.99
At Q =500 Total cost = 15.5*8400 + (500/2)6 + (8400/500)50 = 130200 +1500 + 840 = $ 132540
At Q = 1000 Total cost = 15 *8400 + (1000/2)6 + (8400/1000)50 = 126000 +3000 + 420 = $129420
Baker
At Q = 374 Total cost = 16.10*8400 + (374/2)6 + (8400/374)50 = 135884 + 1122+ 1122.995 = $138129
At Q = 400 Total cost = 15.60*8400 + (400/2)6 + (8400/400)50 = 131040 + 1200 + 1050 = $133290
At Q = 800 Total cost = 15.10*8400 + (800/2)6 + (8400/800)50 = 126840 + 2400 + 525 = $129765
So Supplier allen is best as the total cost is low at Q = 1000 units . Supplier allen should be used with order quantity Q = 1000 units
c) From b) we can tell that
Optimal order Quantity = 1000 units
Total annual cost of ordering + purchasing + holding the component = $129420
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