As a part of its procurement strategy, a company is evaluating whether it should switch to a new supplier. A part of the evaluation will focus on the price schedules that the two suppliers are offering. Supplier A offers the company the following quantity discount schedule.
Order Quantity Price per Unit
0–4999…………………… $25
5000–9999……………… $24
10,000 or more………… $22
Supplier B is offering the following quantity discount schedule.
Order Quantity Price per Unit
0–3999……………….. $26
4000–7999……………….. $25
8000–12,499………………. $23
12,500 or more………… $21
The annual demand for the product is 240,000 units. The cost of placing an order, independent of the supplier or the order quantity, is $250, and the carrying charge is estimated to be 20% of the item’s price. Which supplier and what order quantity should the company use if its objective is to minimize its total related inventory costs?