Question

Each year, Florida's Best Salad Dressing, Inc. (FBSD) purchases 50,000 gallons of extra virgin olive oil. Ordering costs are $90.00 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

Solution:

First we have to find the EOQ for FBSD

EOQ=SQRT(2*Annual demand*cost per orders/Holding cost per unit)

=SQRT(2*50,000*$90/($0.50*80%)

=SQRT(22500,000)

=4743 gallon

Total cost=Ordering cost+Holding cost

Total cost under EOQ is:

=(50,000/4743)*$90+(4743/2)*0.5*0.80

=$948.77+948.60

=$1897.37

Total cost when firm order 10,000 gallons

=(50,000*/10,000)*$90+(10,000/2)*$0.47*0.80

=$450+$1880

=$2,330

Increase in cost when firm order quantity is 10,000 gallons is;

=$2330-$1897.37=$432.63

Benefit when firm order quantity is 10,000 gallons is;

=$0.03*50,000 gallon=$1500

Thus,net benefit in dollars if FBSD takes the discount is;

=$1500-$432.63=$1067.37