Company A uses an unstable chemical compound that must be kept in an environment

Question

Company A uses an unstable chemical compound that must be kept in an environment where both temperature and humidity can be controlled. Company A uses 800 pounds per month of the chemical, estimates the holding cost to be 50% of the purchase price (because of spoilage), and estimates order costs to be $50 per order. The cost schedule of 2 suppliers are as follows:

a) What is the economic order quantity for each supplier?

b) What quantity should be ordered, and which supplier should be used?

c) what is the total cost for the most economic order size?

d) what factor(s) should be considered besides total cost?

Vendor 1 Vendor 2 Quantity Price/lb Quantity Price/lb 1-499 $    17.00 1-399 $    17.10 500-999 $    16.75 400-799 $    16.85 1000+ $    16.50 800-1199 $    16.60 1200 + $    16.25

Explanation / Answer

a) for vendor A

(1000*17) + 0.5*1000*17 = 50x

so, x = economic order quantity = 510

for vendor B

1200*16.25 + 0.5*1200*16.25 = 50x

so, x = economic order quantity =585

b) since, economic order quantity B > economic order quantity A

so, B should be chosen and 585 units must be ordered

c) total cost = 50*585 = $29250

d) besides total cost, overhead charges, transportation and operational cost must be considered

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