Part A is already answered however I am struggling on part B its at the bottom.

Question

Part A is already answered however I am struggling on part B its at the bottom.

Part A- A company manufacturing bicycles has a current annual demand of 1,500 bikes. In buying bike tires, they pay $14 per tire with an estimated carrying cost of 20% of the tire’s cost. Each order cost $25 to process. Orders are placed on the first of each month for an equal amount every month. Determine the current ordering cost, carrying cost and total inventory cost each year using the current order quantity. Calculate the EOQ. Determine the current ordering cost, carrying cost and total inventory cost each year using the quantity found from the EOQ calculations.

Part B- So we already know the answer to the question above if the vendor of bicycle tires is offering free ordering processing if they increase their order size. What is the MAXIMUM size order which would make this offer appealing to the bicycle manufacturer?

Explanation / Answer

The total inventory cost for the EOQ order size, is lowest inventory cost for bicycle manufacturer. If any other order size option gives cost as minimum as inventory cost at EOQ lot, it is always acceptable. If the order processing is set free, than the cost per order is zero. Thus, only carrying cost will be there and no ordering cost will be incurred. The order size for free order processing should be such that the carrying cost is equal to total inventory cost for EOQ order size:

Carrying cost = Total inventory cost for EOQ lot = $458.26

Let the order quantity be Q,

Carrying cost = $458.26 = Q/2 x $2.8

Q = 458.26 x 2/2.8 = 327.33

Thus, maximum order size should be 327.33 units for which order processing can be set to zero and will be appealing for manufacturer.   

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