University Book Store buys women's polo T-shirts from a supplier according to the price schedule shown below. The store sells 500,000 T-shirts each year. The annual carrying cost of T-shirts is 25 percent, and the ordering cost is $40. What order quantity would give the Book Store the lowest total acquisition cost? (Due to possible differences in rounding, choose the closest answer.)

Question

University Book Store buys women's polo T-shirts from a supplier according to the price schedule shown below. The store sells 500,000 T-shirts each year. The annual carrying cost of T-shirts is 25 percent, and the ordering cost is $40.  What order quantity would give the Book Store the lowest total acquisition cost? (Due to possible differences in rounding, choose the closest answer.)

Quizplus · Accepted Answer

EOQ @ $35 price = sqrt[(2 × 500,000 × $40)/($35 ×.25) = 2,138 unitsICC @ $35 = (2,138/2)($35)(.25) = $9,353.75Order cost @ $35 price = (500,000/2,138) ×$40 = $9,354.54Product cost @ $35 price = 500,000 ×$35 = $17,500,000Total cost @ $35 price = $17,500,000 + $9,354.54 + $9,353.75 = $17,518,708.29EOQ @ $32 price = sqrt[(2 × 500,000 × $40)/($32 × .25) = 2,237 units; however you must order 2,500 to obtain the $32 price.ICC @ $32 = (2,500/2)($32)(.25) = $10,000Order cost @ $32 price = 500,000/2,500($40) = $8,000Product cost @ $32 price = 500,000($32) = $16,000,000Total acquisition cost @ $32 price = $16,000,000 + $8,000 + $10,000 = $16,018,000Thus, ordering 2,500 units in each order gives the lowest total annual ordering cost.

University Book Store Buys Women's Polo T-Shirts from a Supplier