Question

The PIT U.S.A. company has multiple stores in which it sells a type of electric juicer for orange juice. The demand for this item in its stores is distributed evenly throughout time and amounts to 6240 units annually. The cost related to ordering that product from the manufacturer amounts to $90 per order and the cost related to maintaining the inventory has been estimated at 20% of the cost of these. The manufacturer offers the following prices, which depend on the quantity purchased in each order.

Order Quantity	Price per Unit
1-299	$10.00
300-599	9.75
600-999	9.50
1,000-4,999	9.40
5,000 or more	9.38

Make a complete analysis of this situation and submit a recommendation to the president of PIT U.S.A. about the amount of juicers to order in each order. Support the reason for your recommendation clearly and convincingly. Summarize in a table all the results of the cost elements as well as the lot sizes computed and considered.

Answer 1

The right amount of juicers to order in each order is 770 units.

This ordering quantity has been arrived at analysing the total cost which is arrived by adding 3 components of cost which are inventory carrying cost, total ordering cost and total procurement cost.

As ordering cost and inventory carrying cost tend are inversely proportional we have to find the optimal ordering quantity at which both the ordering cost and carrying cost is at the minimum. That juncture is at 770 units per order.

Total Cost = per unit price * Annual demand quantity + Total ordering cost + Total inventory carrying cost

The table given below will explain this