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Working capital management – Inventory control

2.2 EOQ with quantity discounts

Discounts may be offered for ordering in large quantities. If the EOQ is smaller than
the order size needed for a discount, should the order size be increased above the
EOQ?

To work out the answer you should carry out the following steps.

Step 1: Calculate EOQ, ignoring discounts.

Step 2: If the EOQ is below the quantity qualifying for a discount, calculate the
total annual inventory cost arising from using the EOQ.

Step 3: Recalculate total annual inventory costs using the order size required to
just obtain each discount.

Step 4: Compare the cost of Steps 2 and 3 with the saving from the discount, and
select the minimum cost alternative.

Step 5: Repeat for all discount levels.

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