The manager at Robert's Cigars wants to determine the lowest cost order policy given the following purchase discounts offered: cigar costs are $4 each for orders less than 500; $3.50 each for orders of 500 - 1000; and $3.25 each for orders greater than 1000. The order cost = $75, annual demand forecast = 5500 cigars, inventory carrying cost = 30% per year.

What will be an ideal response?


Step 1

Determine the 3 EOQ's-
For $4 cigars, EOQ = = 829 (infeasible, since EOQ > 500.

For $3.50 cigars, EOQ =  = 886 (feasible range, since EOQ > 500 but < 1000.
For $3.25 cigars, EOQ == 920 (infeasible, since EOQ < 1000, so must order 1001 to get the discount.

  
Step 2

Calculate the total annual inventory costs for the $3.50 and the $3.25 cigars:

TIC3.50 = O+I+P = (75) + (.3)(3.50) + 5500(3.50) = $465.58 + $465.15 + $19,250 = $20,180.73
TIC3.25 = O+I+P =(75) +(.3)(3.25) + 5500(3.25) = $412.09 + $487.99 + $17,875 = $18,775.08

  
 

So, the lowest cost order policy is to order 1001 cigars at a time, pay $3.25 per cigar, for a total inventory cost of $18,775.08

?



Business

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