Given that
• Demand D = 600 (units)
• Order costs S = $20 per order
• Unit storage costs H = 30% * Purchase price of
one
Theunit
yield deduction
policy
Q mass 1 to 49 50 to 249 250 or more
Price (P) $5/piece $4.50/piece $4.10/piece
How much the company should purchase with the optimal output
level for one order?
Economic order quantity is a technique that identifies the
optimal ordering units for one order
where:
• D = Demand in units (typically on an annual
basis)
• S = Order cost (per purchase order)
• H = Holding costs (per unit, per year)
Total annual cost = annual purchase cost + annual ordering
cost + annual holding cost
TC = DP + (D/Q)*S +
• (Q/2)*H,
TC = Total annual cost
where:
• D = Demand (annual)
• P = Cost per unit
• Q = Quantity to be ordered
• S = Setup cost or cost of placing an order
• H = Annual holding and storage cost per unit of average
inventory
- Step 1: Calculate Unit storage costs (H) for each
price per unit
- Step 2: Calculate EOQ for each
price per unit
- Step 3: Compare each calculated EOQ with the price tier
thresholds and Calculate the Total Cost for Each Price Tier
Price (P) $5/piece $4.50/piece $4.10/piece
H $1.50 $1.35 $1.23
EOQ (units) 126.49 133.33 139.69
Feasible No Yes No
Feasible Q 49 133 250
Total Cost $3,281.6 $2,880 $2,661.75
The company should purchase 250 units to minimize the
total cost