Due to long standing relationship with your firm, the supplier has agreed to giv
ID: 376469 • Letter: D
Question
Due to long standing relationship with your firm, the supplier has agreed to give you quantity discounts based on the number of units you procure from them. The ordering cost of the product is $4000 per order. The inventory carrying cost is $25 per unit per year. The annual demand for the product is estimated as 100,000 units.
The quantity discounts are 1 to 6000 units are $1500 per unit, 6001+ units are $1200 per unit.
What is the total cost for ordering this product from your supplier at optimal quantity?
Select one:
a. $150,141,421
b. $150,197,653
c. $180,176,792
d. $120,141,668
e. None of the above
Explanation / Answer
Annual demand, D = 100,000
Ordering cost, S = 4000
Inventory carrying cost, H = 25
Economic order quantity, Q = (2DS/H) = (2*100000*4000/25) = 5657
For this quantity, applicable price, P = 1500
Total annual cost for ordering, inventory carrying and purchase = (D/Q)*S + (Q/2)*H + D*P = (100000/5657)*4000 + (5657/2)*25 + 100000*1500 = $ 150,141,421
For Q = 6001, total annual cost = (100000/6001)*4000 + (6001/2)*25 + 100000*1200 = $ 120,141,668
Lowest cost (120,141,668) is associated with Q = 6001.
ANSWER: d. $120,141,668