Problem Cost of Opportunity: Company ABC purchases material TH. Each purchase order costs the com...
Problem Cost of Opportunity:
Company ABC purchases material TH. Each purchase order costs the company $ 60.00. The price of the TH material is $ 0.35 per 10,000 units, which is the amount he usually buys. If the company buys 250,000 units or more, the price is $ 0.30. The company buys 500,000 units per year. The company has enough cash to be able to buy the inventory. The annual interest on government bonds is 5%
What is best?
Homework Answers
EOQ with price 0.35 per 10000
= [ 2 x annual demnd x ordering cost / holding cost of a unit per year]1/2
Assuming that one unit is of 10000 units
= [ 2 x50 x60 / 0.35x0.05]1/2 =5855400 units
Total cost with 10000 quantity
= Purchase cost +ordering cost + holding cost
= 0.35x50+500000/10000 x60 + 10000/2 x 0.35x0.05 x1/10000
17.5+3000+0.00875 =3017.5
Total cost with 250000 quantity
0.3x50+ 2x60+ 250000/2 x0.35x0.05x1/10000
=15+120+0.2187 = 135.21
Option 2 of ordering 250000 units is much better as it has lower cost.
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