Given the following MRP matrix for Item C:

If each order cost $500 and the holding cost is $0.75 per item per period,the periodic order quantity would be
A)3 periods of requirements
B)2 periods of requirements
C)1 period of requirements
D)0 period of requirements

Question

Given the following MRP matrix for Item C:

If each order cost $500 and the holding cost is $0.75 per item per period,the periodic order quantity would be
A)3 periods of requirements 
B)2 periods of requirements 
C)1 period of requirements 
D)0 period of requirements

Quizplus · Accepted Answer

The periodic order quantity should be chosen based on the lowest total cost, which includes the ordering cost and holding cost. In this case, if we order for 1 period, we would need to place 3 separate orders as there are 3 periods of requirements. The total ordering cost would be 3 x $500 = $1500. The holding cost would be 11 x 0.75 = $8.25 per period. Therefore, the total cost for ordering for 1 period would be 3 x $500 + 3 x $8.25 = $1516.25. 
If we order for 2 periods, we would need to place 2 separate orders as there are 2 periods with positive requirements. The total ordering cost would be 2 x $500 = $1000. The holding cost would be 8 x 0.75 = $6 per period. Therefore, the total cost for ordering for 2 periods would be 2 x $500 + 2 x $6 = $1012.
If we order for 3 periods, we would only need to place 1 order to cover all the requirements. The ordering cost would be $500 and the holding cost would be 5 x 0.75 = $3.75. Therefore, the total cost for ordering for 3 periods would be $500 + $3.75 = $503.75. 
Thus, ordering for 3 periods of requirements would result in the lowest total cost and is the best choice.

Given the Following MRP Matrix for Item C