Answer:
If the firm buys at the least price $146
Annual demand (D) = 8,000 units
Ordering cost per order (Co) = $500
Holding cost per item per annum (H)= 12% x $146 = $17.52
EOQ = √ 2DCo
H
EOQ = √ 2 x 8,000 x $500
$17.52
EOQ = 676 units
The solution is not feasible since 676 units cannot be bought at $146. Thus, EOQ is 5,000 units.
Total cost of 5,000 units
= Total ordering cost + Total holding cost + Total purchase cost
= DCo + QxH + Price x Annual demand
Q 2
= 8,000 x $500 + 5,000 x $17.52 + $146 x 8,000
5,000 2
= $800 + $43,800 + $1,168,000
= $1,212,600
Step-by-step explanation:
In this case, we need to calculate the EOQ at the lowest price offered by the supplier. The lowest price gives the minimum total cost. EOQ equals square root of 2 multiplied by annual demand and ordering cost per order divided by holding cost per item per annum. The holding cost per item per annum is calculated as 12% of the price of $146.
The calculated EOQ of 676 units is not feasible because the quantity does not qualify for the price of $146. The minimum price that could be bought at $146 is 5,000 units. Thus, it becomes the EOQ.
Total cost is calculated as total ordering cost plus total holding cost plus total purchase cost. The company should buy 5,000 units at $146 in order to minimize the total cost.