1.

Assume that the following quantity discount schedule is appropriate: Order Size
Discount (%) Unit Cost 0 to 49 0 $30.00 50 to 99 5 $28.50 100 or more 10 $27.00 If
annual demand is 120 units, ordering costs are $20.00 per order, and the annual
Holding rate is 25%, what order quantity would you recommend?
Assume that the following quantity discount schedule is appropriate:

Order Size Discount Unit Cost

0 to 49 0 $30.00
50 to 99 5 $28.50
100 or more 10 $27.00

If annual demand is 120 units, ordering costs are $20.00 per order, and the annual
Holding rate is 25%, what order quantity would you recommend?
Solution

2 *120 * 20
𝑄 (0 𝑡𝑜 49) = 0.25*30
= 25

2 *120 * 20
𝑄 (50 𝑡𝑜 99) = 0.25*28.5
= 26

2 *120 * 20
𝑄 (100 𝑜𝑟 𝑚𝑜𝑟𝑒) = 0.25*27.00
= 27

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 (𝑄 = 25) =( )20 + ( )(0. 25 * 30) + 30 * 120 = 3789. 75

120
25
25
2

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 (𝑄 = 26) = ( )20 + ( )(0. 25 * 28. 5) + 28. 5 * 120 = 3604. 93

120 26
26 2

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 (𝑄 = 27) = ( )20 + ( )(0. 25 * 30) + 27. * 120 = 3430. 14

120 27
27 2

The total cost is minimal for Q (100 or more), therefore I recommend order quantity "100
or more".
Answer: "100 or more".
2. Keith Shoes Stores carries a basic black dress shoe for men that sells at an
approximately constant rate of 500 pairs of shoes every three months. Keith's current
buying policy is to order 500 pairs each time an order is placed. It costs Keith $30 to
place an order. The annual holding cost rate is 20%. With the order quantity of 500,
Keith obtains the shoes at the lowest possible unit cost of $28 per pair. Other quantity
discounts offered by the manufacturer are as follows. What is the minimum cost order
quantity for the shoes? What is the annual savings of your inventory policy over the
policy currently being used by Keith?

Order Quantity Price per Pair

0-99 $36
100-199 $32
200-299 $30
300 or more $28

To find the optimal order quantity, we will calculate the Economic Order Quantity (EOQ)
for each price level offered by the supplier. Then, we will select the one offering the
lowest cost.
For the EOQ, we use the following formula:

2 * 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 * 𝑂𝑟𝑑𝑒𝑟 𝐶𝑜𝑠𝑡

𝑄= 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑅𝑎𝑡𝑒*𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡

For the total cost, we use the following formula:

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 𝑄
𝐶(𝑄) = 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 * 𝑈𝑛𝑖𝑡 𝐶𝑜𝑠𝑡 + 𝑄
* 𝑂𝑟𝑑𝑒𝑟 𝐶𝑜𝑠𝑡 + 2
* 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑅𝑎𝑡𝑒 * 𝑈𝑛𝑖𝑡

2 * 500 * 4 * $30
● If the price is $36, the EOQ is 𝑄 = 0.20 * 36
= 129 units

This order quantity is too large to get this price. Hence, we adjust it to the nearest
feasible value of 99, and find the total cost
4 * 500 99
𝐶(99) = 4 * 500 * $36 + 99
* $30 + 2
* 0. 20 * $36

= $72,000+ $606 + $356 = $72,962

2 * 500 * 4 * $30
● If the price is $32, the EOQ is 𝑄 = 0.20 * 32
= 137 𝑢𝑛𝑖𝑡𝑠

This order quantity is feasible, and we find the total cost as

4 * 500 137
𝐶(137) = 4 * 500 * $32 + 137
* $30 + 2
* 0. 20 * $32

=$64,000 + $438 + $438 = $64,876

 2 * 500 * 4 * $30
● If the price is $30, the EOQ is 𝑄 = 0.20 * 30
= 140 𝑢𝑛𝑖𝑡𝑠

This order quantity is too low to get this price. Hence, we adjust it to the nearest feasible
value of 200, and find the total cost:
4 * 500 200
𝐶(200) = 4 * 500 * $30 + 200
* $30 + 2
* 0. 20 * $30

= $60,000+ $300 + $600 = $60,900

2 * 500 * 4 * $30
● If the price is $28, the EOQ is 𝑄 = 0.20 * 28
= 146 𝑢𝑛𝑖𝑡𝑠

This order quantity is too low to get this price. Hence, we adjust it to the nearest feasible
value of 300, and find the total cost:
4 * 500 300
𝐶(300) = 4 * 500 * $28 + 300
* $30 + 2
* 0. 20 * $28

= $56,000+ $200+840 + $57,040

Hence, the minimum-cost order quantity is 300 units
Now we find the current cost if ordering 500 units:
4 * 500 500
𝐶(500) = 4 * 500 * $28 + 500
* $30 + 2
* 0. 20 * $28

=$56,000+ $120+$1,400 = $57,520

The annual savings are
𝐶(500) − 𝐶(300) $28 = 57, 520 − 57, 040 = $480

CAPORADO,JAMEL S.
BSA 1-D
MANAGEMENT SCIENCE