As an inventory manager, you must decide on the order quantity for an item. Its annual demand is 350 units. Ordering cost is $20 each time an order is placed, and the holding cost is 30 percent of the per-unit price. Your supplier provided the following price schedule.
What is the annual cost discrepancy between the optimal order policy and the second best order policy?
A) Less than $5
B) Between $5 and $10
C) Between $10 and $20
D) More than $20

Question

As an inventory manager, you must decide on the order quantity for an item. Its annual demand is 350 units. Ordering cost is $20 each time an order is placed, and the holding cost is 30 percent of the per-unit price. Your supplier provided the following price schedule. 
What is the annual cost discrepancy between the optimal order policy and the second best order policy?
A) Less than $5 
B) Between $5 and $10 
C) Between $10 and $20 
D) More than $20

Quizplus · Accepted Answer

The optimal order quantity is 59 units, which results in an annual cost of $402.89. The second best order quantity is 58 or 60 units, which both result in an annual cost of $408.31. The annual cost discrepancy between the two policies is $5.42, which falls between the range of $5 and $10, so the answer is B. Based on the price schedule, the best choice is to order 59 units at a time.

As an Inventory Manager, You Must Decide on the Order