Determine optimal number to order D = 1,000 units S = $10 per order H = $

Accounting Oct 26, 2020

Determine optimal number to order D = 1,000 units S = $10 per order H = $.50 per unit per year The pack has 150 units each Management underestimated demand by 50% C = $5/unit There is a discount of 5% per unit if you buy more than 500 units .

Expert Solution

At Management's estimated Demad i.e. 1000 units

Calculation of total cost at different order level
Optimal numbers to order (in units)	No. of orders	Total purchasing cost	Total Ordering Cost	Total Carrying Cost	Total Cost
150	7	$ 5,000	$ 70	$ 38	$ 5,108
300	4	$ 5,000	$ 40	$ 75	$ 5,115
450	3	$ 5,000	$ 30	$ 113	$ 5,143
600	2	$ 4,750	$ 20	$ 150	$ 4,920
750	2	$ 4,750	$ 20	$ 188	$ 4,958
900	2	$ 4,750	$ 20	$ 225	$ 4,995

				Minimum Cost	$ 4,920

It would be viable to order in lot size of 600 units, because total cost in less compared to other lot sixe.

At Actual Demad i.e. 2000 units

Calculation of total cost at different order level
Optimal numbers to order (in units)	No. of orders	Total purchasing cost	Total Ordering Cost	Total Carrying Cost	Total Cost
150	14	$ 10,000	$ 140	$ 38	$ 10,178
300	7	$ 10,000	$ 70	$ 75	$ 10,145
450	5	$ 10,000	$ 50	$ 113	$ 10,163
600	4	$ 9,500	$ 40	$ 150	$ 9,690
750	3	$ 9,500	$ 30	$ 188	$ 9,718
900	3	$ 9,500	$ 30	$ 225	$ 9,755
1,050	2	$ 9,500	$ 20	$ 263	$ 9,783
1,200	2	$ 9,500	$ 20	$ 300	$ 9,820
1,350	2	$ 9,500	$ 20	$ 338	$ 9,858
1,500	2	$ 9,500	$ 20	$ 375	$ 9,895
1,650	2	$ 9,500	$ 20	$ 413	$ 9,933
1,800	2	$ 9,500	$ 20	$ 450	$ 9,970
1,950	2	$ 9,500	$ 20	$ 488	$ 10,008

				Minimum Cost	$ 9,690

It would be viable to order in lot size of 600 units, because total cost in less compared to other lot sixe.

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