A manufacturer is sourcing a component for a new product. Expected monthly deman

Question

A manufacturer is sourcing a component for a new product. Expected monthly demand is 705 units. The component can be purchased from either supplier A or supplier B, with the following price breaks:

SUPPLIER A
Quantity    Unit Price   
1–199        $14.00   
200–499 13.80
500 + 13.60   

SUPPLIER B

Quantity Unit Price

1–149 $14.10

150–349 13.90

350 + 13.50

Ordering cost is $39 and annual holding cost is 25 percent of unit price per unit.

a. Which supplier should be used?
b. What order quantity is optimal if the objective is to minimize total annual costs?
c. What is the minimum total annual cost?

Explanation / Answer

149*141.1+200*13.90+356*13.5)/705 =

9686.90/705 = $13.74

a. Supplier B should be used being low cost at $11114.20

b. Optimal Ordering quantity is 127 units

c. the minimum total annual cost = $11114.20

Supplier A Supplier B Weighted Average price per unit 9727.60/705 = $13.80

149*141.1+200*13.90+356*13.5)/705 =

9686.90/705 = $13.74

EOQ =SqRt[(2 *705 * $39) / 13.80*0.25] = 127 =SqRt[(2 *705 * $39) / 13.74*0.25] = 127 Ordering cost 705/127 * 39 = $216.50 705/127 * 39 = $216.50 Holding cost 705/2 * 13.80*0.25 = $1216 705/2 * 13.74*0.25 = $1211 Minimum total annal cost =705*13.80 + 216.50 + 1216 = $11161.50 = 705*13.74 + 216.50 + 1211 = $11114.20

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