Clement Bait & Tackle has been buying a chemical water conditioner for its bait

Question

Clement Bait & Tackle has been buying a chemical water conditioner for its bait (to help keep its baitfish alive) in an optimal fashion using EOQ analysis. The supplier has now offered Clement a discount of $0.50 off all units if the firm will make its purchases quarterly. = $25. Current data for the problem are: D=1800 units per year, s = $6.00, 1 = 15% per year, P a. What is the EOQ at the current behavior? b. What is the annual total cost of continuing their current EOQ-based behavior? c. What is the annual total cost, if they accept the proposed discount? d. At the cheaper of the two total costs, are carrying costs equal to ordering costs? Explain.

Explanation / Answer

EOQ = sqrt(2*Demand*Ordering cost/Holding cost)

Holding cost = Interest*Price

a) EOQ = sqrt(2*1800*6/(15%*25)) = 76 units

b) Total cost = Demand/EOQ*Ordering cost + EOQ/2*Holding cost + Price*Demand = 1800/76*6 + 76/2*(15%*25) + 1800*25 = 45285

c) Now ordering is done quarterly, thus EOQ = 1800/4 = 450, Price = 24.5

Total cost = 1800/450*6 + 450/2*(15%*24.5) + 1800*(24.5) = 44951

d) The lower cost is for quarterly ordering

Ordering cost = Demand/EOQ*Ordering cost = 1800/450*6 = 24

Holding cost = EOQ/2*Holding cost = 450/2*(15%*24.5) = 827

So, it is different as Cost to hold a unit is high than ordering which is very less

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