Question

Problem 2. A large producer of household products purchases a glyceride used in one of its deodorant soaps from outside of the company. It uses the glyceride at a fairly steady rate of 40 pounds per month and the company uses a 21 percent annual interest rate to compute holding costs. The chemical can be purchase from two suppliers, A and B. A offers the following all-unit discount schedule. If the order quantity is less than 700 pounds, the price per pound is $1.25: if the order quantity is larger than or equal to 700 pounds but less than 1400 pounds, the price per pound is $1.15; if order quantity is larger than or equal to 1400 pounds, the price per pound is $1.05. Supplier B, on the other hand, offers the following incremental discount schedule: $1.3 per pound for all orders less than or equal to 600 pounds and $1.1 per pound for all incremental amounts over 600 pounds. Assume the cost of order processing for each case is $200. Which supplier should be used?

Answer 1

B G annual demand holding cost % ordering cost 480 21% holding cost Holding cost %* cost per pound) 200 per order $ total cost $ supplier A 0-700 700-1400 more than 1400 supplier B less than 600 more than 600 1.25 per pound 1.15 per pound 1.05 per pound EOQ in pound 855 not valid 892 valid 933 not valid 1440.724 (quantity *price per pound)+ holding cost + ordering cost 1.3 per pound 1.1 per pound 839 not valid 912 valid 2257.569 EOQ = sqrt(2*annual demand*cost per oder/ holding cost) 16 thus supplier A is better priced than supplier B 17