A manufacturer of exercise equipment purchases the pulley section of the equipment from a supplier who lists these prices: $5 each for less than 1,000; $4.95 each for 1,000 to 3,999; $ 4.90 each for 4,000 to 5,999; and $4.85 for 6,000 or more. Fixed ordering costs are $50.00, annual holding costs are 40 percent of the purchase cost, and annual demand is 4,900 pulleys. Determine an order quantity that will minimize total cost.

500 units

Explanation:

An order quantity that will minimize total cost is the economic order quantity (EOQ). In order to calculate this, we use the EOQ formula as follows:

............................................................. (1)

D = Demand or annual usage = 4,900

F = Fixed ordering cost = $50

H = Holding cost = 40% × $4.90 = $1.96

Note that since annual demand is 4,900 which falls within 4,000 to 5,999, the purchase cost is therefore $4.90.

Substituting the values into equation (1), we have:

Therefore, an order quantity that will minimize total cost is 500 units.

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