Page 105 - F2 - MA Integrated Workbook STUDENT 2018-19
P. 105
Accounting for materials
3.3 EOQ with discounts
If a quantity discount is accepted this will have the following effects:
The annual purchase price will decrease.
The annual holding cost will increase.
The annual ordering cost will decrease.
Example 3
A company has been approached by their supplier who would be willing to
offer a discount on orders over 500 units of 5%.
Information regarding current inventory costs is as follows:
Holding cost per unit per annum = 10% of purchase price
Order costs = $2 per order
Annual demand = 15,000 units
Purchase price = $15
Current EOQ quantity = 200 units
The new optimal order quantity is:
Order quantity 200 500
Purchase costs 15,000 × $15 = $225,000 15,000 × $15 × 95% =
213,750
Ordering costs $2 × 15,000 / 200 = $150 $2 × 15,000 / 500 = $60
Holding costs $15 × 10% × 200/2 = $150 $15 × 95% × 10% × 500 /
2 = $356
Total annual cost $225,300 $214,166
The new optimal order quantity is 500 units
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