An oil change shop is trying to determine how many cases of engine oil they should order from its distributor. They use 60,000 cases per year. Annual carrying cost is 20% of the item cost. Ordering cost is $8.50 per order. The distributor offers the following quantity discount schedule:
Quantity.........Cost
1-999............ $5.00
1000-1999 ......$4.50
2000+............ $4.25
1. What is the EOQ for each item cost?
2. What is total cost (holding cost + ordering cost + material cost) if they buy at $4.50 per case at the minimum total cost point on $4.50 curve (EOQ point for $4.50)?
3. What is total cost at the item cost of $4.25 and Q=2000 (lowest allowable order quantity from supplier for this price)?
4. What is the final order quantity you recommend (one that results the lowest total cost)?