Question

5. Skatz Company is one of the leading manufacturers of roller blades. In their plant they do assembly only, and all components are purchased from external suppliers. They are unhappy now with their current supplier of rollers and decided to find a new source for their top-of-the-line model. The demand is 400,000 rollers per year, and they received different price schedules from two different suppliers. Supplier A gave a flat rate of $3 per roller regardless of the quantity ordered. Supplier B provided the following all units discount price schedule: $3.25 per roller if the order quantity is less than 5000, $3.00 per roller if the quantity is 5000 or more but less than 15,000, and $2.60 per unit for any quantity beyond 15,000. Assume that all the suppliers have the same roller quality. The order cost is $150 and inventory holding cost is taken to be 30 percent annually. Evaluate the optimal quantity to be ordered.

Answer 1

We will calculate economic order quantity (EOQ) for all options and choose the one which is feasible and lowest inventory cost option.

Supplier A-

Flat rate of $3

EOQ = square root (2*D*S/H)

where D is annual demand, S is ordering cost, H is holding cost annually.

EOQ = square root (2*400000*150/(3*0.3)) = ~11,547

Supplier B-

1)

Option for ordering less than 5000 with price of $3.25

EOQ = square root (2*D*S/H)

= square root (2*400000*150/0.3*3.25)

= 11,094

This is not feasible since quantity range for this price is less than 5000

2) Option for quantity 5000 and less than 15000 at price of $3 is already calculate for Supplier A with EOQ of ~11,547

3) Option of ordering quantity above 15000 at price of $2.6

EOQ = square root (2*D*S/H)

= square root (2*400000*150/0.3*2.6)

= 12,403

This is again not feasible since the quantity range for this price is above 15000.

Hence, the Optimal quantity to be ordered is ~11,547

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