Thomas Corporation produces heating units. The following values apply for a part used in their production (purchased from external suppliers):

D ¼ 12,500

Q ¼ 250

P ¼ $45

C ¼ $4.50

Required:

1. For Thomas, calculate the ordering cost, the carrying cost, and the total cost associated with an order size of 250 units.

2. Calculate the EOQ and its associated ordering cost, carrying cost, and total cost. Compare and comment on the EOQ relative to the current order quantity.

3. What if Thomas enters into an exclusive supplier agreement with one supplier who will supply all of the demands with smaller, more frequent orders? Under this arrangement, the ordering cost is reduced to $0.45 per order. Calculate the new EOQ and comment on the implications.