Answer:
The optimal order quantity for the period is 233 units
Explanation:
As per given data
Cost = $85
Price = $110
Residual value = $35
First we need to calculate the overage and underage cost of the item
Overage cost = Cost - Residual value
Overage cost = $85 - $35
Overage cost = $50
and
Underage cost = Price - Cost
Underage cost = $110 - $85
Underage cost = $25
Now determint the critical ratio
Critical ratio = Underage cost / ( Overage cost + Underage cost )
Critical ratio = $25 / ( $50 + $25 )
Critical ratio = 0.33333
AS demand is equally divided between 200 and 299, so the optimal order quantity will be
Optimal Order quantity = Lowest demand + Critical ratio ( Highest demand - Lowest demand )
Optimal Order quantity = 200 units + 0.33333 ( 299 units - 200 units )
Optimal Order quantity = 200 units + 33 units
Optimal Order quantity = 233 units
