PROBLEM 12.

15a (PAGE 544)

Given in the question:

D = 1200
S = $25
H = $24
Calculate total costs if Q is 25, 40, 50, 60 and 100
Total cost = Annual ordering costs + Annual holding costs
=

D
S
Q

Q
H
2

1200
Q
=
x $25 +
x $24
Q
2

PROBLEM 12.15a (PAGE 544)

Calculate total costs if Q is 25, 40, 50, 60 and 100
TOTAL
1200
Q
=
x $25 +
x $24
COST
Q
2

Substitute Q with
25, 40, 50, 60 and
100 respectively

Substitute Q with
25, 40, 50, 60 and
100 respectively

ANNUAL ORDERING
COSTS (AOP)

ANNUAL HOLDING
COSTS (AHP)

TOTAL COST
(AOP + AHP)

25
40
50
60
100

1200
750
600
500
300

300
480
600
720
1200

1500
1230
1200
1220
1500

PROBLEM 12.15b (PAGE 544)

Given in the question:

D = 1200
S = $25
H = $24

Find Q*
Q
*

Q* =

2DS
H

= 50

2 x 1200 x 25
24

The implication if we make error

in calculating EOQ is: the total
cost will not be minimized.

PROBLEM 12.16a (PAGE 544)

Given in the question:

D = 240
Q = 601
H = $10 x 40% = $4
Find ordering cost (S) if 60 is optimal (Q*). So, you need to substitute
Q, D and H with the given values above
Q*

60 =

2DS
H

2 x 240 x S
4

Break the square root by squaring both sides

PROBLEM 12.16a (PAGE 544)

Break the square root by squaring both sides
60 x 60 =

3600

= $ 30

2 x 240 x S
4
2 x 240 x S
4

2 x 240 x S
4

PROBLEM 12.16b (PAGE 544)

If ordering cost is greater than $30, optimal order quantity (Q*) will
also be greater than 60. For example, if the S = $35, Q* will be 64.81.
Therefore, the company should revise its order size (Q) to the new Q*
if it wants to minimize total costs.

PROBLEM 12.23 (PAGE 545)

Given in the question:

D = 700 x 12 = 8400
S = $50
H = $5

To calculate Q*, use the formula

Q*

2DS
H
Q*

2DS
IP

* Take note that in this problem we do not use the

formula
because the holding cost is constant ($5). The IP formula will only be
used when the question says the holding cost is in certain percentage
of the unit price.

PROBLEM 12.23 (PAGE 545)

Hence, Q* is:
Q* =
=

2 x 8400 x 50
5

409.88
Q*

2DS
IP

As this problem does not use the

formula, you do not need to
calculate the Q* for each price respectively, as they will all be the same
(i.e. 409.88).

PROBLEM 12.23 (PAGE 545)

BAKER
MFG

ALLEN
MFG

Now, you need to decide whether you should adjust Q* (409.88) for
each price or not.
Ask this question if I order 409.88 units, am I entitled to that price?
If the answer is yes, you do not need to adjust the Q*. Otherwise,
adjust accordingly.
Quantity

UNIT PRICE

Q*

ADJUSTED
Q*

1-499

$16.00

409.88

409.88

500-999

$15.50

409.88

500

1000+

$15.00

409.88

1000

1-399

$16.10

409.88

399

400-799

$15.60

409.88

409.88

800+

$15.10

409.88

800

As you can get the stated price if you order

409.88 (your Q*), you do not need to
adjust Q*.

Your Q* falls within the given

range for that price

ANNUAL PRODUCT COST = UNIT PRICE x ANNUAL DEMAND (D)

D
ANNUAL ORDERING COST = S
Q

BAKER
MFG

ALLEN
MFG

PROBLEM 12.23 (PAGE 545)

ANNUAL HOLDING COST = Q H
2

ANNUAL ANNUAL
ADJUSTED
ANNUAL
ANNUAL
HOLDING ORDERING
Q*
PRODUCT COST
TOTAL COSTS
COST
COST
409.88
$134,400.00 $1,024.70 $1,024.69 $136,449.39

Quantity

UNIT PRICE

Q*

1-499

$16.00

409.88

500-999

$15.50

409.88

500

$130,200.00

$1,250.00

$840.00

$132,290.00

1000+

$15.00

409.88

1000

$126,000.00

$2,500.00

$420.00

$128,920.00

1-399

$16.10

409.88

399

$135,240.00

$997.50

$1,052.63

$137,290.13

400-799

$15.60

409.88

409.88

$131,040.00

$1,024.70 $1,024.69

$133,089.39

800+

$15.10

409.88

800

$126,840.00

$2,000.00

$129,365.00

$525.00

SUBSTITUTE
WITH THE
VALUE FOR
ADJUSTED
Q*

CHOOSE
THE
LOWEST
ANNUAL
TOTAL
COSTS

ANNUAL TOTAL COSTS = ANNUAL PRODUCT COST + ANNUAL HOLDING COST + ANNUAL ORDERING COST

Hence we will order 1000 units from Allen Mfg as to minimize total costs

PROBLEM 12.27 (PAGE 546)

Given in the question:

D = 800 x 12 = 9600
S = $50
I = 50% of product price

To calculate Q*, use the formula Q *

Hence, Q* is different for each price

2DS
IP

PROBLEM 12.23 (PAGE 545)

2DS
Q
IP

Q* for each price is different for this problem as we use Q*

VENDOR 2

VENDOR 1

Quantity UNIT PRICE

Q*

ADJUSTED
Q*

ANNUAL
PRODUCT
COST

2DS
IP

ANNUAL ANNUAL
ANNUAL
HOLDING ORDERIN
TOTAL COSTS
COST
G COST

1-499

$17.00

336.0672

336.07

$163,200.00 $1,428.29 $1,428.29 $166,056.57

500-999

$16.75

338.5659

500

$160,800.00 $2,093.75 $960.00 $163,853.75

1000+

$16.50

341.1211

1000

$158,400.00 $4,125.00 $480.00 $163,005.00

1-399

$17.10

335.0831

335.08

$164,160.00 $1,432.48 $1,432.48 $167,024.96

400-799

$16.85

337.5598

400

$161,760.00 $1,685.00 $1,200.00 $164,645.00

800-1199

$16.60

340.0921

800

$159,360.00 $3,320.00 $600.00 $163,280.00

1200+

$16.25

343.7351

1200

$156,000.00 $4,875.00 $400.00 $161,275.00

Hence we will order 1200 units from Vendor 2 as to minimize total costs