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Answer :
It is advisable for the garage owner to order an optimal quantity of 69 motors instead of buying all 600 at once. He can save $21,240.
From the given table, we observe that for quantities between 1 and 49, the price per unit is $35.00. For quantities between 50 and 99, the price per unit decreases to $34.00. For quantities between 100 and 499, the price further decreases to $33.00. Finally, for quantities of 500 or more, the price per unit is $30.00.
To determine the optimal order quantity and potential cost savings, we can use the Economic Order Quantity (EOQ) model. The EOQ formula is given by:
EOQ = √[(2DS) / H],
where:
D = Annual demand,
S = Ordering cost per order, and
H = Holding cost per unit per year.
In this case, the annual demand is 600 motors, the ordering cost per order is $40, and the holding cost per unit per year is $10.
Using the EOQ formula, we can calculate the optimal order quantity:
EOQ = √[(2 * 600 * 40) / 10]
= √[(48000) / 10]
= √4800
= 69.28 (rounded to 69)
Therefore, the advised order quantity would be 69 motors.
To calculate the cost savings, we need to compare the total costs under the current strategy of ordering 600 motors at once with the cost using the recommended order quantity of 69 motors.
For the current strategy:
Total cost = (600 * Price per unit) + Ordering cost + Holding cost
= (600 * $30) + $40 + (600 * $10)
= $18,000 + $40 + $6,000
= $24,040
Using the recommended order quantity of 69 motors:
Total cost = (69 * Price per unit) + Ordering cost + Holding cost
= (69 * $30) + $40 + (69 * $10)
= $2,070 + $40 + $690
= $2,800
The cost savings would be the difference between the two total costs:
Cost savings = Total cost (current strategy) - Total cost (recommended order quantity)
= $24,040 - $2,800
= $21,240
Learn more about Economic Order Quantity here:
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