The Annual Demand for an Item Is 40,000 Units A What Is the Optimal Behaviour?
B

question 165

Essay

The annual demand for an item is 40,000 units. The cost to process an order is $40 and the annual inventory holding cost is $3 per item per year. What is the optimal order quantity, given the following price breaks for purchasing the item?
$\begin{array}{|l|l|}\hline\text { Quantity } & \text { Price } \\\hline 1-1,499 & \$ 2.50 \text { per unit } \\\hline 1,500-4,999 & \$ 2.30 \text { per unit } \\\hline 5,000 \text { or more } & \$ 2.25 \text { per unit } \\\hline\end{array}$ a. What is the optimal behaviour?
b. Does the firm take advantage of the lowest price available? Explain.

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