A small refrigeration shop stocks up on electric motors from a catalog supplier
ID: 422865 • Letter: A
Question
A small refrigeration shop stocks up on electric motors from a catalog supplier located in the Midwest. The price of the motors varies depending on the quantity purchased; the price breaks are shown in the table. The refrigeration shop knows it will need around 600 motors for the coming season and that it will cost them about $40 to place an order. The company determined that its inventory carrying cost is 20%.
Options
Quantity
Price/unit
A
1–49
$35.00
B
50–99
$34.00
C
100 and above
$33.00
Quantity
Price/unit
A
1–49
$35.00
B
50–99
$34.00
C
100 and above
$33.00
Explanation / Answer
This prolem can be solved usin economic order qunatity formula.
where Economic order quantity = square root of [(2 x annual demand x ordering costs) ÷ carrying costs]
where annual demand = 600
orderin cost = 40$
inventory carrying cost = 20% of cost price.
for A typre order (1-49 quantity) - ordering cost = 35*0.2 = $7
for B typre order (50-99 quantity) - ordering cost = 34*0.2 = $6.8
for A typre order (100+ quantity) - ordering cost = 33*0.2 = $6.6
EOQ for case A = sqrt((2*40*600)/7) = 82.8
EOQ for case B= sqrt((2*40*600)/6.8) = 84.0
EOQ for case C = sqrt((2*40*600)/6.6) = 85.3
In all the three cases the ordering quantity is above 50 and below 100. So we need to for ordering 84 units at regular intervals at a price of $34 per unit.
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