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6896-4-25 AID: 7798 | 02/07/2015

In order to select the optimal order size for personal computers follow the steps shown
below:

Step1: Calculate the order cost for different units of order made by the company as
shown below:

For an order up to 25 units, the firm charges $350 when the order increases beyond 25
units but stays till 50, the firm charges $315. Also, the firm charges $285 for an
additional order greater than 50 units.

This can be further simplified as shown below:

Thus, the order cost for each unit of quantity ordered is derived using the rates charged
by the firm.

Step2: Derive the average annual cost incurred when the order is made at different
units of quanitity as shown below:

Here,

= total demand per year

K= ordering cost
Q= units of orders
I = interest charged
C (Q) = order cost

Substitute the values when quantity is less than 25 units i.e. ( ), the order cost is
$350 as shown below:

At the minimum cost

The minimum cost that occurs at quantity of 13 units is shown below:

Thus, the average annual cost that is incurred when order is less than 25 units
(i.e.13 units) is $88,436

Similarly, calculate the order quantity when size of the order lies between 26 and 50 and

substitute the value of order cost as as shown below:

At the minimum cost

Thus, the optimal order at the order cost is 85 units which is not feasible to
undertake as the order limit is between 26 units and 50 units.

Similarly, calculate the order quantity when size of the order lies beyond 50 units

and substitute the value of order cost as as ahown below:

At the minimum cost

The minimum cost that occurs at quantity of 145 units is shown below:

Thus, the average annual cost that is incurred when the ordered size is greater than 50
(i.e. 145 units) is $79,758.

Step3: Compare costs with different units and obtain the least cost unit for ordering
items as shown below:

Different costs incurred when ordered from different sources is as follows:

Alternatives Optimal quantity Cost

13 units $88,436
 85 units Not feasible
145 units $79,758

Thus, the firm should order 145 units at the least cost $79,758.