Question

Part A Suppose Big Box Office Supply (BBOS) purchases 100,000 office chairs every year. Ordering costs...

Part A

Suppose Big Box Office Supply (BBOS) purchases 100,000 office chairs every year. Ordering costs are $95.00 per order and carrying costs are $5.25 per chair.

a) What is BBOS’s total inventory cost per year, including both carrying costs and ordering costs, if BBOS orders the EOQ of office chairs?

Part B

Using the same data as Part A, Big Box Office Supply (BBOS) is able to negotiate a reduction in the carrying costs to $3.50 per chair, but BBOS’s chair supplier offers a quantity discount of $0.20 per chair if BBOS orders 5,000 chairs at a time rather than the EOQ.

b) Determine the before–tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $3.50 per chair whether or not the discount is taken.)

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