University Bookstore buys women's polo T-shirts from a supplier according to the price schedule shown below. The store sells 500,000 T-shirts each year. The annual carrying cost of T-shirts is 25 percent, and the ordering cost is $40.
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The lowest total annual acquisition cost for the bookstore quantity is closest to: (Due to possible differences in rounding, choose the closest answer.)
A. $16,018,000
B. $16,018,708
C. $17,518,707
D. $16,258,000
A. $16,018,000
Explanation:
EOQ @ $35 price = sqrt[(2 × 500,000 × $40)/($35 × .25)] = 2,138 units
ICC @ $35 = (2,138/2) × ($35) × (.25) = $9,353.75
Order cost @ $35 price = (500,000/2,138) × $40 = $9,354.54
Product cost @ $35 price = 500,000 × $35 = $17,500,000
Total cost @ $35 price = $17,500,000 + $9,354.54 + $9,353.75 = $17,518,708.29
EOQ @ $32 price = sqrt[(2 × 500,000 × $40)/($32 × .25)] = 2,237 units; however, you must
order 2,500 to obtain the $32 price.
ICC @ $32 = (2,500/2) × ($32) × (.25) = $10,000
Order cost @ $32 price = (500,000/2,500) × $40 = $8,000
Product cost @ $32 price = 500,000 × $32 = $16,000,000
Total acquisition cost @ $32 price = $16,000,000 + $8,000 + $10,000 = $16,018,000
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