Determine the economic order quantity

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DBS is a manufacturer of hi-tech digital devices in Melbourne. It uses a special part to make its devices. DBS requires an average of 24,000 units of this special part every year in its manufacturing process. The major supplier of the special part that DBS has been dealing with, is a preferred supply chain partner who charges a price per unit of $9000 for the part. Each order costs $1700 to process. Because of limited storage space, the operations manager wants to factor in inventory holding cost at 34.5% of unit cost.

(1) Determine the economic order quantity (EOQ) and annual total cost assuming no waste disposal

(2) Environmental considerations, material losses and waste disposal can be included in the EOQ model to improve inventory management practices. Assume that on an average 12.25% of the parts that DBS purchases are damaged in transit thus becoming unusable and have to be disposed of. Disposal cost is $640 per unit. Find the new EOQ and total annual cost when the disposal cost is considered. What implications does this have for DBS' sustainability practices?

(3) Explain the implications to the operations manager of DBS if estimates of inventory holding costs include fixed, semi-variable, and pure variable costs while setup (order) costs include only pure variable costs.

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Microeconomics: Determine the economic order quantity
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