Question

Each year, Florida's Best Salad Dressing, Inc. (FBSD) purchases 50,000 gallons of extra virgin

olive oil. Ordering costs are $95.00 per order, and the carrying cost, as a percentage of inventory

value is 80 percent. The purchase price to FBSD is $0.50 per gallon. FBSD’s management currently

orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a

quantity discount of $0.03 per gallon if FBSD orders 10,000 gallons at a time. What is the net benefit

in dollars if FBSD takes the discount? Enter your answer rounded to two decimal places. Do not enter

$ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in

the answer box.

Answer 1

EOQ = √((2x Annual demand x ordering cost)/ carrying cost per unit
EOQ = √((2x 50000 x 95)/($0.5*0.8)
EOQ = 4874 gallons
Total cost at EOQ -4,874 gallons
Annual Carrying cost	(4874/2)x$0.4	974.80
Ordering cost	(50000/4874)*100	1025.85
Total cost at EOQ		2000.65
Total cost at discount offer quantity (10,000 gallons)
Annual Carrying cost	(10000/2)x$0.47 x.80	1880.00
Ordering cost	(50,000/10,000)*95	475.00
Total cost at discounted price -10000 gallons		2355.00
Increase in Annual cost		354.35
Saving on price reduction	(50000x $0.03)	1500
Net benefit		1145.65