A high volume quicklube shop is trying to determine how many cases of oil they s

Question

A high volume quicklube shop is trying to determine how many cases of oil they should order from their oil distributor per time to service their business. Their business uses 60,000 cases of oil per year. The annual carrying cost is 20% of the acquisition cost. Their order cost is $8.50. The distributor delivers their orders all at one time, but offers the quantity discounts on larger quantities ordered shown below. Based on the total annual cost, how many cases of oil should the owner order? (BONUS)

Range of Order           Acquisition Cost

Quantities                    Per Case

1 1000                       $5.00

1001 2000                 $4.50

2001 +                         $4.25

Explanation / Answer

There are no storage costs involved in the order. The item is also not mentioned as perishable.

So if the company is requiring 60,000 cases of oil per year, it is better to go for the order that satisfies one full year's business, By doing so the company will cut down on the ordering cost that is involved per order.

This is only feasible if there are no storage costs involved and the items shelf life is more than a year.

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