Adam Inc. has gone out on bid for a regular component. Expected demand is 700 un

Question

Adam Inc. has gone out on bid for a regular component. Expected demand is 700 units per month. The item can be purchased from either Ashar Manufacturing or David Manufacturing. Their price lists are shown below. Ordering cost is $50, and annual holding cost per unit is $5.

Ashar Mfg.                                                                  David Mfg.  

Quantity                Price/unit                              Quantity                Price/unit

1- 499                      $16.00                                      1 – 399                   $16.10

500 – 999              $15.50                                      400 – 799              $15.60

1000+                      $15.00                                      800+                         $15.05

What is the optimal order quantity? Which supplier should be used? Why?

Explanation / Answer

Answer 1:

Optimal Order Quantity = [2 * (Annual Usage in Units * Setup Cost) / Annual Carrying Cost per Unit]^(1/2)

= [2 * ((700*12months) * $50) / 5]^(1/2)

= 409.88 = Approx 410

Answer 2:

We should use Ashar Mgf. because the total cost is lesser than David mfg.

Ashar Mfg cost = 410 units* $16 =$6560

David Mfg cost = 399*16.10 + 11*15.60 = $6595

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