Question

M.P. VanOyen Manufacturing has gone out on bid for a regulator component. Expected demand is 725 units per month. The item can be purchased from either Allen Manufacturing or Baker Manufacturing. Their price lists are shown in the table Ordering cost is $55, and annual holding cost per unit is $4

    

Allen Mfg.		Baker Mfg.
Quantity	Unit Price	Quantity	Unit Price
1-499	$16.00	1-399	$16.10
500-999	15.50	400-799	15.60
1000+	15.00	800+	15.10

a) What is the economic order quantity if price is not a consideration? 

b) Which supplier, based on all options with regard to discounts, should be used? 

Answer 1

Answer: D = Demand (quantity demand per year) = average monthly demand*12= 725*12= 8700

S = Setup costs (order cost) = $55

H = Holding costs = $4 per year

1. EOQ, Economic order quantity = √(2SD / H) = 131.90 ~132
2. Supplier should be used is Allen Mfg. Because if we order 132 units, then unit price in Allen Mfg is less in the case of of 1-499.