Optimal ordering quantity and the optimal annual cost

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Reference no: EM132268766

Annual consumption of mustard by a catering company is 7000 liters. Mustard is bought from a supplier with the following pricing pattern: (i) 4.00 liras per liter if order quantity is less than 1000 liters, (ii) 3.80 liras per liter if order quantity is equal or more than 1000 but less than 1500 liters, (iii) 3.70 liras per liter if order quantity is equal or more than 1500 liters. There is also a fixed ordering cost of 100 liras per order and holding cost is evaluated based on a yearly interest rate of 20%.

a) What is going to be the optimal ordering quantity and the optimal annual cost?

b) Suppose that the owner of the catering company has decided to purchase mustard from another supplier which has offered a different pricing policy: (i) 3.95 liras per liter if order quantity is less than 800 liters, (ii) in case the order amount exceeds 800 liters: 3.95 liras per liter for the first 800 and 3.50 liras per liter for the remaining amount exceeding 800 liters. Fixed ordering cost from this supplier is 100 liras and inventory holding cost is again based on an interest rate of 0.20. What is going to be the optimal ordering quantity if the purchasing contract is signed with this new supplier. What is the optimal annual cost in this case?

Reference no: EM132268766

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