HOMEWORK 2

Genesis Carolina Castañeda Ventura # 66-4767-2018

1. To determine whether Wang should take the quantity discount, we need to compare the
total cost of ordering without the discount to the total cost of ordering with the
discount.

Without the discount:

Annual demand = 1,400 units

Ordering cost per order = $25

Number of orders per year = 1,400/300 = 5 (rounded up)

Annual ordering cost = $25 x 5 = $125

Cost per unit = $400

Carrying cost per unit = 20% of $400 = $80

Annual carrying cost = $80 x 1,400 = $112,000

Total, annual cost without discount = $125 + $112,000 = $112,125

With the discount:

Cost per unit after discount = 0.95 x $400 = $380

Annual demand = 1,400 units

Ordering cost per order = $25

Number of orders per year = 1,400/300 = 5 (rounded up)

Annual ordering cost = $25 x 5 = $125

Cost per unit = $380

Carrying cost per unit = 20% of $380 = $76

Annual carrying cost = $76 x 1,400 = $106,400

Total annual cost with discount = $125 + $106,400 = $106,525

Therefore, Wang should take the quantity discount, as it would result in a total annual cost
savings of $5,600.
2. To determine the best order quantity, we need to calculate the total annual cost for
each quantity option and choose the one with the lowest cost.

Let's consider the three quantity options separately:

For order quantities of 0 to 200 units:

Cost per unit = $4

Annual demand = 2,500 units

Ordering cost per order = $10

Number of orders per year = 2,500/200 = 13 (rounded up)

Annual ordering cost = $10 x 13 = $130

Carrying cost per unit = 30% of $4 = $1.20

Annual carrying cost = $1.20 x 2,500 = $3,000

Total, annual cost = $130 + $3,000 = $3,130

For order quantities of 201 to 2,000 units:

Cost per unit = $3.50

Annual demand = 2,500 units

Ordering cost per order = $10

Number of orders per year = 2,500/1,000 = 3 (rounded up)

Annual ordering cost = $10 x 3 = $30

Carrying cost per unit = 30% of $3.50 = $1.05

Annual carrying cost = $1.05 x 2,500 = $2,625

Total annual cost = $30 + $2,625 = $2,655

For order quantities of 2,001 units or more:

Cost per unit = $3.25

Annual demand = 2,500 units

Ordering cost per order = $10

Number of orders per year = 2,500/2,001 = 2 (rounded up)

Annual ordering cost = $10 x 2 = $20

Carrying cost per unit = 30% of $3.25 = $0.975

Annual carrying cost = $0.975 x 2,500 = $2,438

Total annual cost = $20 + $2,438 = $2,458

Therefore, the best order quantity for the bookstore is to order 2,001 units or more,
which results in the lowest total annual cost of $2,458.