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Calculating economic order quantity

Rocky Mountain Tire Center sells 20,000 go-cart tires per year. The ordering cost for each order is $40, and the holding cost is 20% of the purchase price of the tires per year. The purchase price is $20 per tire if fewer than 500 tires are ordered, $18 per tire if 500 or more - but fewer than 1,000 - tires are ordered, and $17 per tire if 1,000 or more tires are ordered. How many tires should Rocky Mountain order each time it places an order?

Solution Preview

D =Total demand= 20000 units per year
S = ordering cost=$40 per order

Case-1 Price is $20 (ordered quantity is less than 500 units)
P = Item purchase price = $20.00 per unit
H=Holding cost per year=20% of $20=$4.00
EOQ=(2DS/H)^0.5=(2*20000*40/4)^0.5=632.4555 or 632 units
This is not a feasible solution as it does not lie in quantity bracket of 0-499.

Case-2 ...

Solution Summary

Solution describes the steps to calculate economic order quantity in the given case.

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