Question

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

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.

Economic order quantity (EOQ) = ((2 * annual demand * ordering cost) / carrying cost per unit)^(1/2)
= ((2 * 50,000 * 100) / (2 * 5%))^(1/2)
= (10,000,000 / 0.10)^(1/2)
= 100,000,000^(1/2)
= 10,000 boxes

Annual cost at 10,000 boxes (EOQ) = Annual Carrying cost + Ordering cost
= ((10,000 / 2) * 0.10) + ((50,000 / 10,000) * 100)
= 500 + 500
= 1000.

Annual cost on 20,000 boxes (quantity discount offer) = Annual Carrying cost + Ordering cost
= ((20,000 / 2) * 0.10) + ((50,000 / 20,000) * 100)
= 1000 + 250
= 1250.

Increase in annual cost = 1250 - 1000 = 250

Savings on price reduction = 50,000 * 2 * 1% = 1000

Net savings = 1000 - 250 = 750

Thus, the company should accept quantity discount.