Question

Questions 26-30 refer to the following information. Medco Distributors has an annual demand for portable ventilators of 1,000 units. Medco's cost of purchasing a ventilator is $500. Annual holding costs are $50 per ventilator and the ordering cost is $250 per order. On orders of 200 or more ventilators, the manufacturer gives a 2% discount off of the unit cost (so the unit cost is $490 per ventilator instead of $500). Ignoring the quantity discount offer, what is Medco's economic order quantity Q*? Select one: a. 20 units b. 50 units C. 141 units d. 100 units Ignoring the quantity discount offer, what are Medco's annual ordering costs? Select one: a. $1,000/year b. $2,500/year

Answer 1

Question: Medco Distributors has an annual demand for portable ventilators of 1000 units. Medcos cost of purchasing a ventilator is $500. Annual holding costs are $50 per ventilator and the ordering cost is $250 oer order. On orders of 200 or more ventilators, the manufacturer given a 2 % discount off of the unit cost (so the unit cost is $490 per ventilator instead of $500)

Answer:

Given that:

• Annual Demand (D) = 1000
• Ordering Cost (S) = 250
• Holding Cost (H) = 50
• Unit Cost (C) = 500

a. Ignoring the quantity discount offer, what is Medco's economic order quantity Q*?

Economic Order Quantity EOQ is given by the formula:

EOQ = Sqrt( 2 x D x S / H )

Therefore:

EOQ = Sqrt( 2 x 1000 x 250 / 50 )

EOQ = Sqrt( 10000 )

EOQ = 100 units

b. Ignoring the quantity discount offer, what are Medco's annual ordering costs?

Annual Ordering Cost is given by the formula:

Annual Ordering Cost = (D x S) / EOQ

Therefore:

Annual Ordering Cost = (1000 x 250) / 100

Annual Ordering Cost = $2500 / year

c. Ignoring the quantity discount offer, what are Medco's annual purchasing costs?

Annual Purchasing Cost, is given by the formula:

Annual Purchasing Cost = C x D

Therefore:

Annual Purchasing Costs = 1000 x 500

Annual Purchasing Costs = $500000 / year

d. If Medco's takes the quantity discount offered by the manufacturer, what will be the total annual costs of ordering, holding, and purchasing ventilators?

Here, given that:

• EOQ = 200
• C = 490

Total Annual Cost, is given by the formula:

Total Annual Cost = (D x S) / EOQ + (EOQ x H) / 2 + C x D

Therefore:

Total Annual Cost = (1000 x 250) / 200 + (200 x 50) / 2 + 490 x 1000

Total Annual Cost = 1250 + 5000 + 490000

Total Annual Cost = $496250 / year

e. Assuming Medco's takes the quantity discount, how often will Medco order?

Number of orders per year is given by the formula:

Number of orders per year = Demand / EOQ

Therefore:

In this case EOQ = 200

Number of orders per year = 1000 / 200

Number of orders per year = 5 times / year