Emery Pharmaceutical uses an unstable chemical compound that must be kept in an
ID: 327185 • Letter: E
Question
Emery Pharmaceutical uses an unstable chemical compound that must be kept in an environment where both temperature and humidity can be controlled. Emery uses 800 pounds per month of the chemical, estimates the holding cost to be 50% of the purchase price (because of spoilage), and estimates order costs to be $49 per order. The cost schedules of two suppliers are as follows: Vendor 1 Quantity Price/lb 1-499 $17.00 500-999 $16.75 1,000+ $16.50 Vendor 2 Quantity Price/lb 1-399 $17.10 400-799 $16.85 800-1,199 $16.60 1,200+ $16.25 This exercise contains only parts a, b, and c. a) What is the economic order quantity for each supplier? For Vendor 1 at $17.00/pound, the economic order quantity is 333 units (round your response to the nearest whole number). For Vendor 2 at $17.10/pound, the economic order quantity is 332 units (round your response to the nearest whole number). b) What quantity should be ordered and which supplier should be used? Therefore the best option is to place the order with Vendor 2 for an order size of 1,200 units. c) The total cost for the most economic order size is $ (round your response to the nearest whole number).Explanation / Answer
D = 800
S = 49
H = 50% of cost
A) Assuming 17/pound by Vendor 1 and 17.10/pound by Vendor 2 as the cost.
H for Vendor 1 = 50% of 17 = 8.5
Thus EOQ for Vendor 1 = sqrt(2*D*S/H) = sqrt(2*800*49/8.5) = 96.03
H for Vendor 2 = 50% of 17.10 = 8.55
Thus EOQ for Vendor 2 = sqrt(2*D*S/H) = sqrt(2*800*49/8.55) = 95.75
b) Total Cost from Vendor 1 = Ordering Cost + Holding Cost + Purchase Cost = D*S/EOQ + EOQ*H/2 + Purchase cost
= 800*49/96.03 + 96.03*8.5/2 + 499*17 + 301*16.75 = 14341.08
Total Cost from Vendor 2 = Ordering Cost + Holding Cost + Purchase Cost = D*S/EOQ + EOQ*H/2 + Purchase cost
= 800*49/95.75 + 95.75*8.55/2 + 399*17.10 + 400*16.85 +1*16.60 = 14398.23
B) Considering the total cost, Vendor 1 is preferable at order quantity of 96.03
C) The Total Cost - 14341.08
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