Problem:
(Use for the next three problems)
Standard Manufacturing Corporation (SMC) buys sheet metal from a dedicated supplier for use in its operations. On average, SMC uses 100 square yards (a square yard of metal is commonly referred to as simply a yard) of sheet metal per day. The cost of placing an order for sheet metal is $100. The sheet metal costs $1.50 per yard. SMC operates 250 days out of the year. Their inventory carrying cost is based on a 10% cost of capital. [You need to compute “D” and “H” before solving the problems.]
Question 1. Assuming no quantity discounts, what is the best order quantity (in yards) for sheet metal?
Question 2. Suppose the supplier only ships steel in rolls of 1000 yards, so SMC must order in multiples of 1000 yards. What would be the optimal order quantity Q? (To speed things up, think of the shape of the total cost curve).
Question 3. Suppose the sheet metal supplier initiates a quantity discount program, with the following price schedule:
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Order size (yards)
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Cost/yard
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1-3999
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$ 1.65
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4000-7999
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$1.50
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8000+
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$1.40
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Given this price schedule, and assuming the rest of the information from the prior page remains the same, how much should SMC order each time?