A manager received a new quotation for take-away boxes from a supplier. It will cost $1.00 a box for order quantities of 801 or more boxes, $1.10 a box for 200 to 800 boxes, and $1.20 a box for smaller quantities.
Ordering cost is $80 per order and carrying costs are $10 per box a year. Tasty Foods uses 3,600 boxes a year (the company is closed for business 5 days in a year). The procurement manager has suggested a “round number” order size of 800 boxes. The manager's rationale is that with a U-shaped cost curve that is fairly flat at its minimum, the difference in total annual cost between 800 and 801 units would be small anyway.
a) How would you reply to the manager's suggestion? Solve for the total cost for each case.
b) If you are given a free hand to rework the procurement decision, what would you recommend.