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Stephanie's Baskets quantitative analysis: Order quantity

Stephanie's Baskets sells wicker baskets at home parties. Stephanie sells 120 baskets/year, carries an ordering cost of $20/order, and an annual holding cost of 25. She currently orders 25 baskets at a time without using discounts. She has the opportunity to purchase at a discount. Given the following pricing sheet, what quantity do you recommend?

DC Category Order Size Discount (%) Unit Cost
1 0-49 0 $30.00
2 50-99 5 $28.50
3 100 or more 10 $27.00

Questions:

1. What order quantity do you recommend?
2. Using this solution, how many times will the owner need to reorder baskets?
3. Should Stephanie's Baskets take advantage of the discount?

Solution Preview

Please see the attached file for the full solution.

The formula for the optimal size of each order (called the EOQ, Economic Order Quantity), is given by:

where:
? D is the demand for each period (in this case, D = 120 because demand is 120 units per year)
? S is the fixed cost per order (in this case, S = 20, because the problem says "... carries an ordering cost of $20/order...")
? H is the holding cost per unit per period (in this case, H = 25, because the problem says "...an annual holding cost of 25."
Note that this formula does not include the potential discounts, but those can be ignored for now.
Moreover, the total yearly cost (including the cost of purchasing the goods) is given by the ...

Solution Summary

Stephanie's Baskets quantitative analysis and order quantity are examined.

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