A manager just received a new price list from a supplier. It will now cost $1.00

Question

A manager just received a new price list from a supplier. It will now cost $1.00 a box for order quanitties of 801 or more boxes, $1.10 a box for 200 to 800 boxes and $1.20 a box for smaller quanitites. Ordering cost is $80 per order and carrying costs are $10 per box a year. the firm uses 3,600 boxes a year. The manager has suggestions a "round number"? order size of 800 boxes. The manager's rationale is that with a U-shaped cost curve that is fairly flat at its minimum, the difference in total annual cost between 800 and 801 units would be small anyway. What order size would you recommend?

I found the answer back of the textbook Q=240 but I want to know step by step how to get that answer.

Explanation / Answer

In all the above situations, the Annual demand, Ordering cost and the carrying costs are fixed. So, there is no other quantity other than EOQ which will give the lowest possible cost.

EOQ = Sqrt( 2 x A x O / C)

= Sqrt( 2 x 3,600 x $80 / $10) = 240 units.

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