A small refrigeration shop stocks up on electric motors from a catalog supplier located in the Midwest. The price of the motors varies depending on the quantity purchased; the price breaks are shown in the table
The refrigeration shop knows it will need around 600 motors for the coming season and that it will cost them about $40 to place an order. Storage cost for the motors is $10 each. In previous years they have bought all 600 at once and they are considering doing this again. What order quantity would you advise and how much can they save using your recommendation instead of their one order per year strategy?
Quantity Price/unit
1-49 $35.00
50-99 $34.00
100-499 $33.00
500 or more $30.00
What will be an ideal response?
Answer:
Q* = = = 69.28 motors
This quantity isn't sufficient for the lowest cost, so costs at this volume and a price of $34 should be compared to the lowest quantity at the next break point, 100 motors for $33 each.
TCQ = 69 = + + DP = + + 600($34) = $21,092.83
TCQ = 100 = + + DP = + + 600($33) = $20,540.00
Buying in quantities of 100 motors results in a lower cost. Buying 600 motors at a time results in a total cost of:
TCQ = 600 = + + DP = + + 600($30) = $21,040.00
It will save the company $500 to purchase 100 motors per order instead of 600 per order.
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