# Operations Management Inventory Quantity Discounts

Please show your calculations and round to FOUR decimal places.

A retailer needs to choose between two suppliers for one of its products. The only criterion used for the decision is the cost. The following information about the product is available:

Demand 200 a week

Ordering cost (for all suppliers) $75 per order

Holding cost 20% of the unit cost

Working weeks 50 a year

The retailer has narrowed down the choices to two suppliers. The following shows the price-break schedule for each supplier:

SUPPLIER A SUPPLIER B

Quantity Unit Price Quantity Unit Price

1-299 $14.00 1-249 $14.10

300-699 13.80 250-449 13.90

700+ 13.60 450+ 13.70

A. Which supplier should the retailer choose? Explain and support your answer with appropriate calculations.

B. What is the optimal lot size for the item? (Note: There has to be only ONE choice, regardless of supplier).

C. What is the total annual cost of inventory for the chosen (best) lot size?

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#### Solution Preview

Operations Management - Inventory Management Quantity Discount

Please show your calculations and round to FOUR decimal places.

A retailer needs to choose between two suppliers for one of its products. The only criterion used for the decision is the cost. The following information about the product is available:

Demand 200 a week

Ordering cost (for all suppliers) $75 per order

Holding cost 20% of the unit cost

Working weeks 50 a year

The retailer has narrowed down the choices to two suppliers. The following shows the price-break schedule for each supplier:

SUPPLIER A SUPPLIER B

Quantity Unit Price Quantity Unit Price

1-299 $14.00 1-249 $14.10

300-699 13.80 250-449 13.90

700+ 13.60 450+ 13.70

A. Which supplier should the retailer choose? Explain and support your answer with appropriate calculations.

B. What is the optimal lot size for the item? (Note: There has to be only ONE choice, regardless of supplier).

C. What is the total annual cost of inventory for the chosen (best) lot size?

D = 200

Ordering Cost = CO = 75

Holding Cost = CH = .20

Let's calculate the Annual Demand

Annual Demand = Weekly Demand X Number Operation Weeks Per Year

D ...

#### Solution Summary

Inventory management has two main types of quantity discount models. We examine the all units discounts to determine which supplier to select and the best ordering quantity.