Rocky Mountain Tire center 11,000 go-cart tires per year. The ordering cost for

Question

Rocky Mountain Tire center 11,000 go-cart tires per year. The ordering cost for each order is $40, and the holding cost is 50% of the purchace price of the tires per year. The purchase price is $21 per tire if fewer than 200 tires are ordered, $19 per tire if 200 or more - but fewer than 8000, tires are orderd and $18 per tire if 8,000 or more tires are ordered.

a. how many tires should rocky mountains tire order each time it time it places an order?

b. what is the total cost of this policy?

c. what is the optimal order size?

Explanation / Answer

Statement showing most economic purchase level.We have,

(a) Rocky Mountain Tire should place an order of 5,000 unit in each time.

(b) Total cost of this policy is $ 232,838.

(c) EOQ =[ ( 2 X total demand x cost of per order ) / Carrying cost]1/2

    EOQ = [ 2 X 11,000 X 40 / 19 X 50% ]1/2

    EOQ = 304 UNIT

Hence, Optimal order size is 304 unit.

Particulars Calculations 1 2 3 Order size 190 5000 8,000 No. of order Annual requirement / order size 58 2.2 1.37 Value of order Order size x price per unit $ 3,990 $95,000 $144,000 Average Inventory Value per order / 2 $1,995 $47,500 $72,000 Ordering cost No. of order x Ordering cost per order $2,320 $88 54.80 Carrying cost 50% of purchase price $ 997.50 $ 23,750 $ 36,000 Annual cost of tyre Annual demand x Price per unit 231,000 $209,000 $198,000 Total Annual Cost $ 234,317.50 $ 232,838 $ 234,054.80

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