Question

A quantity discount of 10% in existing unit price is offered, provided order and supply quantity is at least 500 units.

The following information is given:

Annual demand - 1000 numbers

Procurement cost per order - Rs 100

Inventory carrying cost per annum- 22% of the acquisition cost

Existing unit price ( acquisition cost ) Rs 10

What will be the annual saving ( if any) if discount is availed of, instead of ordering out as per EOQ based on the information above?

Answer 1

D = annual demand = 1000 units
C = cost per unit (w/o discount) = Rs. 10
S = ordering cost = Rs. 100
H = 22% x 10 = Rs. 2.2

EOQ = Q* = (2.D.S / H)^1/2 = SQRT(2*1000*100/2.2) = 302 units.

We will check the total relevant cost (=total ordering + carrying + procurement cost) at Q=302 and Q=500.

Q	C	H=0.22C	Carrying Cost =Q.H / 2	Ordering Cost =(D/Q) x S	Purchase cost =D x C	Total relevant cost
302	10	2.2	332.2	331.1	10000	10663.3
500	9	1.98	495	200.0	9000	9695.0 (min)

The total saving by availing the discount = 10663.3 - 9695 = Rs. 968.3 per annum