Question

A manufacturer procures a subassembly from a supplier. The annual demand is 145,000 units, the cost per unit is $4, the inventory-carrying charge is 12 percent, and the order cost is $225. For orders between 10,000 but less than 30,000, a five percent discount is applied, and for orders exceeding 30,000, a eight percent discount is applied. What is the optimal order quantity? Use the Quantity Discount Excel template to find your answer.

Answer 1

The optimal order quantity is 11659 units.

What is the quantity?

To calculate the optimal order quantity, we can use the economic order quantity (EOQ) formula. The EOQ formula is:

EOQ = √((2AD) / (Ch))

In this case, we have:

A = $225

D = 145,000 units

C = $4

h = 0.12

Plugging these values into the EOQ formula, we get:

EOQ = √((2 * $225 * 145,000) / ($4 * 0.12))

EOQ = 11659 units

Therefore, the optimal order quantity is 11659 units