Question

10. Suppose Stanley's Office Supply purchases 50,000 boxes of pens every year. Ordering costs are $100 per order, carrying costs are 5% of the inventory value, and the price is of $2.00 per box. The vendor now offers a quantity discount of 1% per box if the company buys pens in order sizes of 20,000 boxes. Should the company accept the quantity discount? Show your calculations to justify your decision.

Answer #1

EOQ = √((2x Annual demand x ordering cost)/ carrying cost per unit | ||

EOQ = √((2x 50000 x 100)/ ($2*5%) | ||

EOQ = 10,000 boxes | ||

Annual cost at EOQ -10,000 boxes | ||

Annual Carrying cost | (10000/2)x$0.1 | 500 |

Ordering cost | (50000/10000)*100 | 500 |

Annual cost at EOQ | 1000 | |

Annual cost at discount offer quantity (20,000 boxes) | ||

Annual Carrying cost | (20000/2)x$0.1 | 1000 |

Ordering cost | (50,000/20,000)*100 | 250 |

Annual cost at EOQ | 1250 | |

Increase in Annual cost | 250 | |

Saving on price reduction | (50,000x $2.00 X1%) | 1000 |

Net savings | 750 | |

Company should accept the quantiy discount |

Suppose Stanley's Office Supply purchases 50,000 boxes of pens
every year. Ordering costs are $100 per order, carrying costs are
5% of the inventory value, and the price is of $2.00 per box. The
vendor now offers a quantity discount of 1% per box if the company
buys pens in order sizes of 20,000 boxes. Should the company accept
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