Page 409 - F1 Integrated Workbook STUDENT 2018

Working capital management – receivables, payables, inventory
and cash

3.5 Economic order quantity (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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