Question

# 10. Suppose Stanley's Office Supply purchases 50,000 boxes of pens every year. Ordering costs are \$100...

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.

 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