A manager receives a forecast for next year. Demand is projected to be 500 units

Question

A manager receives a forecast for next year. Demand is projected to be 500 units for the first half of the year and 940 units for the second half. The monthly holding cost is $2 per unit, and it costs an estimated $55 to process an order.

Assuming that monthly demand will be level during each of the six-month periods covered by the forecast (e.g., 100 per month for each of the first six months), determine an order size that will minimize the sum of ordering and carrying costs for each of the six-month periods. (Round your answers to the nearest whole number.)

If the vendor is willing to offer a discount of $10 per order for ordering in multiples of 50 units (e.g., 50, 100, 150), would you advise the manager to take advantage of the offer in either period? If so, what order size would you recommend? (Round intermediate calculations to 2 decimal places.)

A manager receives a forecast for next year. Demand is projected to be 500 units for the first half of the year and 940 units for the second half. The monthly holding cost is $2 per unit, and it costs an estimated $55 to process an order.

Explanation / Answer

a) 1-6 Months=SQRT(2*500*55/2)=166

7-12 months=SQRT(2*940*55/2)=227

b)TC at EOQ

1-6 months=55*500/166+ 2*166/2=332

7-12 months=55*940/227 +2*227/2=455

If we follow the discount offered the lowest cost comes at order size of 200 for 1-6 months

and 250 for 7-12 monts

1-6 months=200

7-12 months=250

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