Ordering and Carrying Costs Annual Cost The TotalCost

Ordering and Carrying Costs Annual Cost The Total-Cost Curve is U-Shaped Ordering Costs QO (optimal order quantity) Order Quantity (Q)

Cost Total Cost Adding Purchasing cost doesn’t change EOQ TC with PD TC without PD PD 0 EOQ Quantity

Example Demand for a product is 816 units / year ==> D = 816 Ordering cost is 12$ / order ==> S = 12 Carrying cost is 4$ / unit / year ==> H = 4 Price schedule is as follows Quantity (Q) 1 -49 50 -79 80 -99 100 or more Price (P) 20 18 17 16 What is the best quantity that we could order to minimize our total annual cost.

Total Cost Including Purchasing Cost p 1 p 2 p 3 p 4 0 EOQ Quantity

Total Cost With Price Discount Cost p 1 p 2 0 EOQ p 3 p 4 Quantity

Total Cost Including Purchasing Cost p 1 p 2 p 3 0 EOQ p 4 Quantity

Total Cost Including Purchasing Cost p 1 p 2 p 4 p 3 0 EOQ Q Quantity

Total Cost Including Purchasing Cost p 1 p 2 0 EOQ p 4 p 3 Q Quantity

Total Cost Including Purchasing Cost p 1 p 3 p 2 0 EOQ Quantity p 4

Example Demand for a product is 816 units / year ==> D = 816 Ordering cost is 12$ / order ==> S = 12 Carrying cost is 4$ / unit / year ==> H = 4 Price schedule is as follows Quantity (Q) 1 -49 50 -79 80 -99 100 or more Price (P) 20 18 17 16 What is the best quantity that we could order to minimize our total annual cost.

Example (Q) 1 -49 50 -79 80 -99 100 or more (P) 20 18 17 16 Q = 70 is in the 50 -79 range, therefore, the corresponding price is 18 dollars. Obviously, we do not consider P = 20 but what about P = 17 or 16

Example Is Q = 70 and P = 18 better or Q = 80 and P = 17 or Q = 100 and P = 16 TC = HQ/2 + SD/Q + PD TC ( Q = 70 , P = 18) = 4(70)/2 +12(816)/70 + 18(816) TC = 14968 TC ( Q = 80 , P = 17) = 4(80)/2 +12(816)/80 + 17(816) TC = 14154 TC ( Q = 100 , P = 16) = 4(100)/2 +12(816)/100 + 16(816) TC = 13354