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Question: A small manufacturing firm uses roughly 3,400 pounds of chemical dye a year. Currently the firm purchases 300 pounds per order and pays $3 per pound. The supplier has just announced that orders of 1,000 pounds or more will be filled at a price of $2 per pound. The manufacturing firm incurs a cost of $100 each time it submits an order and assigns an annual holding cost of 17 percent of the purchase price per pound.
a. Determine the order size that will minimize the total cost.
b. If the supplier offered the discount at 1,500 pounds instead of 1,000 pounds, what order size would minimize total cost?
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