As inventory manager, you must decide on the order quantity for an item that has
ID: 375207 • Letter: A
Question
As inventory manager, you must decide on the order quantity for an item that has an annual demand of 2,000 units. Placing an order costs you $20 each time. Your annual holding cost, expressed as a percentage of average inventory value, is 20 percent. Your supplier has provided the following price schedule:
Minimum Order Quantity
Price Per Unit
1
$2.50
200
$2.40
300
$2.25
1,000
$2.00
What ordering policy do you recommend, and why?
Minimum Order Quantity
Price Per Unit
1
$2.50
200
$2.40
300
$2.25
1,000
$2.00
Explanation / Answer
Starting with the lowest cost of $2.00 ...
EOQ = (2 * 2000 * 20 / 0.20 * 2.00) = 204.12
Not feasible since 447 < 1000
Next, try with $2.25.
EOQ = (2 * 2000 * 20 / 0.20 * 2.25) = 421
Feasible since 421 falls in the range 300-999
The economic order quantity is 421 units
Cost for the above order will be ...
(421/2) * 0.20(2.25) + (2000/421)(20) + 2.25(2000) = 4689.737
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.