Question

Happy Pet, Inc., is a large pet store located in Long Beach Mall. Although the store specializes in dogs, it also sells fish, turtle, and bird supplies. The Everlast Leader, a leather lead for dogs, costs Happy Pet $13 each. There is an annual demand for 4,500 Everlast Leaders. The manager, Stephan Wagner, has determined that the ordering cost is $25 per order and the carrying cost, as a percentage of unit cost, is 12%. Happy Pet is now considering a new supplier of Everlast Leaders. Each lead would cost only $12.35, but, in order to get this discount, Happy Pet would have to buy shipments of 5,000 at a time. Should Happy Pet use the new supplier and take this discount for quantity buying? The total cost without the discount is $ (round your response to the nearest whole number). The total cost with the discount is $ (round your response to the nearest whole number). Should Happy Pet use the new supplier and take this discount for quantity buying? Yes No O

Answer 1

EOQ = [ 2 x annual deMand x ordering cost / holding cost]^1/2

= [ 2 x 4500x25 / 13x0.12]^1/2 = 380

  cost with EOQ = cost of purchase + cost of holding + cost of ordering

= 13x4500+ 380/2 x13x0.12+ 4500/380 x25

= 58500+296.4+296.05 = 59092

Cost with 5000 order size

= 12.35 x4500+ 5000/2 x 12.35x0.12 + 25 x4500/5000

= 55575+3705+22.5 = 59302

The overall cost is more than the second option therefore the company should stick to its original policy and not go for the discount buying.