The Coalition Party came into power in October 2017 and proposes to provide elig
ID: 387908 • Letter: T
Question
The Coalition Party came into power in October 2017 and proposes to provide eligible beneficiaries with hand-held computing devices to enable them to develop sufficient skills to enter the work force. The Party expects to provide 80 000 devices every year. A potential supplier has offered a suitable device, the unit price being subject to quantity discounts as below: Quantity 0-999 1000-4999 5000-9999 10000 and over Price per unit (S) 25.00 22.50 21.00 20.00 Find a) The economic order quantity, and b) Total annual cost of the proposal if: Annual holding cost amounts to 25% of the unit price, per unit .Setup cost is $45.00 per orderExplanation / Answer
A. EOQ = [(2*annual demand*set up cost per order)/holding cost]^0.5
At the lowest price level of $20, EOQ will be = [(2*80,000*$45)/25% of 20]^0.5 = 1,200
However this is not a feasible EOQ as the EOQ size of 1,200 is not in the order quantity range of 10,000 and over.
We next take the highest price of $25 and EOQ for this price point = [(2*80,000*$45)/25% of 25]^0.5 = 1,073.31. This is also not feasible as 1,073.31 does not fall in the range 0-999.
Next we take the price of 22.50. EOQ = [(2*80,000*$45)/25% of 22.5]^0.5 = 1,131.37
This falls within the range 1000-4999 and hence EOQ is 1,131.37 units
b. Total annual cost = annual purchase cost+annual holding cost+annual order cost
Annual purchase cost = 80,000*22.5 = 1,800,000
Annual holding cost = Q/2*holding cost = 1131.37/2*22.5*25% = 3,181.98
Annual order cost = D/Q*cost per order = 80,000/1131.37*45 = 3,181.98
Thus total cost (including purchase cost) = 1,800,000+3,181.98+3,181.98 = $1,806,363.96