Managing Supply Chain and Operations 1st Edition by Thomas Foster ,Scott Sampson,Cynthia Wallin,Scott Webb

Exercise 23

A supplier to your company has offered you a reduced price per unit on a component if you agree to purchase the component in higher order quantities. Currently, you order 5000 units each time an order is placed for the component, and you pay $10 per unit. Your ordering costs are estimated to be $150 per order regardless of the order size. Transportation costs are estimated to be $0.15 per unit. Your cost to hold a component part in inventory is estimated at 20% annually based on the cost of the purchased item. The supplier has offered you a cost of $9.50 per unit if you increase your purchasing quantity to 15,000- Currently, your company purchases 60,000 of these components annually, and this total demand is expected to remain constant for the foreseeable future. Should you continue with your current policy, or should you take the incentive offered by the supplier?