A company experiences annual demand of 1,250 units for an item that it purchases
ID: 449788 • Letter: A
Question
A company experiences annual demand of 1,250 units for an item that it purchases. The rate of demand per day is very stable, with very little variation from day to day. The item costs $50 when purchased in quantities less than 125 and $48 for 125 or more. Ordering costs are $40 and the carrying cost is 20 percent.
a.
What will be the total costs for each alternative? (Round your intermediate calculations and final answers to the nearest dollar amount.)
Total Cost
Unit cost at $50 $ _______
Unit cost at $48 $ _______
b. How much should the company buy each time an order is placed?
The company should buy _____ units.
c.How much the company can save by placing the order? (Round your answer to the nearest dollar amount.)
The company can save $ ______ annually.
Explanation / Answer
D = 1250
Co = $40
H = 20% = 0.2
A)
When C = $50
EOQ = Sqrt((2 * D * Co)/(H*C)) = Sqrt((2 * 1250 * 40)/(0.2*50)) = 100
It lies in the range (0 -125). Therefore EOQ = 100
Now Calculate the Total Cost for each cost level.
TC = (D* C) + ((D/Q)*Co) + (Q/2)*C*H))
When C = $50, Q = EOQ = 100
TC = (1250*50) + ((1250/100)*40) + ((100/2)*0.2*50) = $ 63500
When C = $48, Q = 125
TC = (1250*48) + ((1250/125)*40) + ((125/2)*0.2*48) = $ 61000
B)
The company should buy 125 or more units
C)
The company can save (63500 - 61000) = $2500 annually.
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