Answer:
a) How many tires should Rocky Mountain order each time it places an order?
b) What is the total cost of this policy?
- total costs (including merchandise purchased) = $362,400
- total costs (not including merchandise purchased) = $2,400
Explanation:
we must find the EOQ for the three possible prices:
when price per tire is $17:
EOQ = √(2SD) / H
S = cost per order = $40
D = annual demand = 20,000
H = 20% x $17 = $3.40
EOQ = √[(2 x $40 x 20,000) / $3.40] = 685.99 = 686 tires
when price per tire is $18:
EOQ = √(2SD) / H
S = cost per order = $40
D = annual demand = 20,000
H = 20% x $18 = $3.60
EOQ = √[(2 x $40 x 20,000) / $3.60] = 666.67 = 667 tires
when price per tire is $20:
EOQ = √(2SD) / H
S = cost per order = $40
D = annual demand = 20,000
H = 20% x $20 = $4
EOQ = √[(2 x $40 x 20,000) / $4] = 632.46 = 632 tires
since all options are over 500 units but lower than 1,000, we must take the option where each tire costs $18
total cost:
20,000 x $18 = $360,000
(20,000 / 667) x $40 = $1,199.40
holding costs = average inventory = 667 / 2 = 333.5 x $3.60 = $1,200.60
total costs (including merchandise purchased) = $362,400
