Question

Rocky Mountain Tire Center sells 13,000 go-cart tires per year. The ordering cost for each order is $40, and the holding cost is 50% of the purchase price of the tires per year. The purchase price is $26 per tire if fewer than 200 tires are ordered, $16 per tire if 200 or more, but fewer than 5,000, tires are ordered, and $13 per tire if 5,000 or more tires are ordered.

Answer 1

DEMAND = 13000

ORDERING COST = 40

HOLDING COST % = 50 %

EOQ = SQRT(2 * DEMAND * ORDERING COST / HOLDING COST)

ANNUAL HOLDING COST = ADJUSTED EOQ / 2 * HOLDING COST PER UNIT

ANNUAL ORDERING COST = (ANNUAL DEMAND / ADJUSTED EOQ) * ORDERING COST

ANNUAL MATERIAL COST = ANNUAL DEMAND * OFFERED PRICE PER UNIT

TOTAL COST OF INVENTORY = ANNUAL(HOLDING + ORDERING + MATERIAL)

NO.	LOWER LIMIT	UPPER LIMIT	PER UNIT PRICE	ADJUSTED HOLDING COST	EOQ	ADJUSTED QUANTITY	ANNUAL HOLDING COST	ANNUAL ORDER COST	ANNUAL MATERIAL COST	TOTAL COST OF INVENTORY
1	0	199	26	13	283	199	199 / 2 = 1293.5	13000 / 199 * 40 = 2613.07	13000 * 26 = 338000	1293.5 + 2613.07 + 338000 = 341907
2	200	4999	16	8	361	361	361 / 2 = 1444	13000 / 361 * 40 = 1440.44	13000 * 16 = 208000	1444 + 1440.44 + 208000 = 210884
3	5000	OR MORE	13	6.5	400	5000	5000 / 2 = 16250	13000 / 5000 * 40 = 104	13000 * 13 = 169000	16250 + 104 + 169000 = 185354

OPTIMAL ORDER QUANTITY = 5000

ASSOCIATED COST = 185354

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