Peter drinks 5 cans of Red Bull every week (assuming 50 weeks in a year). Each can costs
$1.5
, and the delivery fee is
$15
per order. The annual holding cost rate is
0.1
. The Red Bull supplier provides a special offer: the price of each can becomes
$1.45
if the order quantity is at least 160 cans. John, therefore, conducts the following analysis: - STEP 1: The EOQ without the discount is around 224 units, and the corresponding minimum ordering + holding cost is
$33.54
. - STEP 2: The ordering + holding cost with the quantity discount is
K ∗
R/160+h
_new
∗160/2=$35.04
. - STEP 3: The additional ordering + holding cost to get the discount offer is
$35.04−$33.54=$1.5
. - STEP 4: The additional saving in the purchasing cost is
R ∗
($1.5−$1.45)=$12.5
. According to the analysis, he decides the quantity
=160
to obtain the discount, but the decision is not optimal. Please choose the earliest step where John makes a mistake.