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Hi Sir,
I watched your lecture, but still don’t know how to calculate the following:
Wivelsfield currently uses the economic order quantity (EOQ) to establish the optimal order quantities for their main raw material.
The company has been approached by an alternative supplier who would be willing to offer the following discounts:
Order quantity
Discount
0 – 199 units
1%
200 – 499 units
3%
500 – 699 units
5%
700 units or more
7%
Information regarding current inventory costs is as follows:
Holding cost per unit per annum = 10% of purchase price
Order costs = $2 per order
Annual demand = 15,000 units
Purchase price = $15
Current EOQ = 200 units
The new optimal order quantity is:
Select one:
a.
700 Correct
b.
203
c.
500
d.
200You must ask in the Ask the Tutor Forum if you wish for me to answer – this forum is for students to help each other.
(You say that you have watched the lecture, but have you watched the lecture on quantity discounts – I explain in detail, with an example, how to deal with questions just like the one you have typed out.)
Hi Sir,
I’m sorry I’m in the wrong place.
I think I was just tired and couldn’t think properly last night 😉
Sorry to bother you again, but if you have a moment could you just check/correct the following calculations:200 – 3% discount
Reorder 15000/200 = 75 x 2 = 150
Holding 200/2=100 x (1.5 x 97%) = 145.5
Purchase 15000 x (15 x 97%) = 218,250Total cost 218,546
203 – 3% discount
Reorder 15000/203 = 73.89 x 2 = 147.78
Holding 203/2 = 101.5 x (1,5 x 97%) = 147.68
Purchase 15,000 x (15 x 97%) = 218,250Total Cost 218,545
500 – 5%
Reorder 15000/500 = 30 x 2 = 60
Holding 500/2 = 250 x (1,5 x 95%) = 356.25
Purchase 15000 x (15 x 95%) = 213,750Total Cost 214,166
700 – 7%
Reorder 15000/700 = 21.43 x 2 = 42.86
Holding 700/2 = 350 x (1.5 x 93%) = 488.25
Purchase 15000 x (15 x 93%) =209,250Total Cost 209, 781
700 has the lowest cost, that’s why it should be the Optimal Order Quantity – is my thinking correct? I would appreciate your opinion on it.
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