Problem 7-11 A company experiences annual demand of 1,740 units for an item that
ID: 364037 • Letter: P
Question
Problem 7-11 A company experiences annual demand of 1,740 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 $58 when purchased in quantities less than 160 and $56 for 160 or more. Ordering costs are $48 and the carrying cost is 20 peroent a. What will be the total costs for each alternative? (Round your intermediate calculations and final answers to the nearest dollar amount.) Unit cost at $58 Unit cost at $56 b. How much should the company buy each time an order is placed? c. How much the company can save by placing the order? (Round your answer to the nearest dollar amount.)Explanation / Answer
Annual demand, D = 1740
Ordering cost, K = 48
Item cost, P = 58 (for Q < 160) and 56 (for Q>=160)
Carrying cost, H = 58*0.2 = 11.6 (for Q<160) and 56*0.2=11.4 (for Q>=160)
EOQ considering the first levle price (58) = (2*D*K/H) = (2*1740*48/11.6) = 120
EOQ is less than 160, therefore, applicable unit cost is $ 58
a) Total cost at $ 58 = (D/Q)*K + (Q/2)*H + P*D = (1740/120)*48 + (120/2)*11.6 + 58*1740 = $ 102,312
Total cost at $ 56 = (D/Q)*K + (Q/2)*H + P*D = (1740/160)*48 + (160/2)*11.2 + 56*1740 = $ 98,858
b) Company should buy 160 units
c) The company can save = 102312 - 98858 = $ 3,454