Question

Milshire Farms uses 6000 pounds per year of a special feed supplement that costs $5 per pound. The supplement’s supplier offers a two percent discount (to $4.90 per pound) if it is ordered in quantities of 3000 pounds or more at a time. It costs $100 to place and receive an order. Wilshire uses an inventory carrying charge of 40 percent of value per year. Determine the economic ordering quantity.

Answer 1

1)	EOQ (without discount) = (2*A*O/Ci)^0.50
	where
	A = Annual requirement in units
	O = Cost of ordering per order
	Ci = Carrying cost $ per unit
	So EOQ = (2*6000*100/(5*40%))^0.50 = 775 units
	Total cost of ordering and carrying if EOQ is used
	= (2*A*O*Ci)^0.50 = (2*6000*100*5*40%)^0.50 =	$            1,549
2)	If price is $4.90, the EOQ would be
	= (2*6000*100/(4.90*40%))^0.5 = $782
	As this is not possible due to the minimum stipulated
	quantity of 3000 units at a time, the order quantity
	would have to be 3000 units.
	This would result in a total ordering and carrying cost
	of 2*100 (ordering cost)+(3000/2)*4.90*40% (carrying cost) =	$      3,140.00
3)	Hence, the economic ordering quantity is 775 units (without
	discount)