Page 269 - DCOM303_DMGT504_OPERATION_RESEARCH
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Operations Research
Notes Step 4: Calculation of Associated Annual Cost:
Total cost = Total purchase price + Total carrying cost + Total ordering cost
= (U × PP/U) + (CPQ/2) + (OU/Q)
1. When Q = 50,000 units
= (2,25,000 × ` 0.01) + ` +
`
= 2,500 + 50 + 50 = ` 2,600
2. When Q = 51.004 units
= (2,50,000 × Re. 0.00961) + ` +
`
= 2,402.50 + ` 49 + ` 49
= ` 2,500.50
Hence, it is better to buy in lot of 10,000 as the foundry can save ` 99.50. When the price to
be paid for a unit of a material is fixed, the price goes on reducing when the lot size
increases. That is to say the price gets broken over different lots in order to facilitate the
purchase to avail quantity discount and optimize the total cost.
Price-break Approach
Under this approach, the EOQ is decided based on the total annual cost associated with different
lots and the lot with least total annual cost would be chosen. Even though this method is similar
to the earlier one, the glaring difference is, under this method, the quantity discount to be
availed is generally be considered for various lots. In other words, the price is broken for
different lot sizes. Hence it is called Price-break Approach. In other words, when the price to be
paid for an unit of a material is fixed, the price goes on reducing when the lot size increases. That
is to say that the price gets broken over different lots in order to facilitate the purchaser to avail
quantity discount and optimize the total cost.
Example: From the following particulars with respect to a particular item of material of
a manufacturing company, calculate the best quantity to order:
Order Quantities (tonne) Price per tonne (`)
Less than 250 6.00
250 but less than 800 5.90
800 but less than 2,000 5.80
2,000 but less than 4,000 5.70
4,000 and above 5.60
The annual demand for the material is 4,000 tonnes : stock holding costs are 20 percent of
material cost p.a. The delivery cost per order is ` 6.00.
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