Question

QUESTION 3:

(a) A Computer Store sells computer supplies. One of its products is white paper for laser printers, stock number 2085511W. The store buys the paper from a regional warehouse that has delivery trucks that make daily rounds to all the customers in its region. The store uses 40 boxes of the paper per day on a 5-day-per-week operation. The supplier charges the store $21.00 per box and delivers 100 boxes of paper per day during the replenishment periods. It costs the store $100 to place an order for the paper, and carrying costs are 25 percent of acquisition cost. The supplier has recently offered a 1 percent discount if its customers will take 200 or more boxes per delivery day. The supplier will deliver less than 100 or 200 boxes on the last delivery day of an order.

(i) What is the present EOQ for the paper?

(ii) What would the EOQ be if the supplier’s discount offer were accepted?

(iii) Should the Computer Store accept the offer?

Answer 1

Demand rate, d = 40 boxes per day

Annual demand, D = 40 boxes per day * 5 days a week * 52 weeks per year = 10400 boxes

Production/Delivery rate, p = 100 boxes per day

Order cost, S = 100

Carrying cost, H = 21*25% = 5.25

(i) Present EOQ = SQRT((2DS/H)*(1-d/p)) = SQRT((2*10400*100/5.25)/(1-40/100)) = 813 boxes

(ii) If the discount offer were accepted, then following parameters would change

Production/Delivery rate, p = 200 boxes per day

Carrying cost, H = 21*(1-1%)*25% = 5.1975

Revised EOQ = SQRT((2DS/H)*(1-d/p)) = SQRT((2*10400*100/5.1975)/(1-40/200)) = 707 boxes

(iii)

Total annual cost of the present EOQ policy = (D/Q)*S + (Q/2)*H*(1-d/p) + D*C = (10400/813)*100 + (813/2)*5.25*(1-40/100) + 10400*21 = $ 220,960

Total annual cost of the discount policy = (D/Q)*S + (Q/2)*H*(1-d/p) + D*C = (10400/707)*100 + (707/2)*5.1975*(1-40/200) + 10400*21*(1-1%) = $ 219,157

Total cost of discount policy is lower. Therefore, the computer store should accept the offer.