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Optimal Order Quantity for Discounts

The document describes a quantity discount model for Wohl's Discount Store, which stocks race cars. It provides a quantity discount schedule with discounts of 0%, 4%, and 5% for order quantities of 0-999, 1,000-1,999, and 2,000 or more cars, respectively. The annual demand is 5,000 cars and the ordering cost is $49 per order. The optimal order quantity that minimizes total inventory costs is 1,000 cars.

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BRENT DECHERY LOPEZ BARCO
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20 views4 pages

Optimal Order Quantity for Discounts

The document describes a quantity discount model for Wohl's Discount Store, which stocks race cars. It provides a quantity discount schedule with discounts of 0%, 4%, and 5% for order quantities of 0-999, 1,000-1,999, and 2,000 or more cars, respectively. The annual demand is 5,000 cars and the ordering cost is $49 per order. The optimal order quantity that minimizes total inventory costs is 1,000 cars.

Uploaded by

BRENT DECHERY LOPEZ BARCO
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

QUANTITY DISCOUNT MODEL

Wohl's Discount Store stocks race cars. Recently, they have been given a quantity discount schedule for t

Discount Number Discount Quantity Discount (%) Discount Price


1 0 to 999 0% 5.00
2 1,000 to 1,999 4% 4.80
3 2,000 and over 5% 4.75

The ordering cost is $49 per order, the annual demand is 5,000 race cars
Inventory carrying charge as a percentage of cost is 20%

What is the order quantity that will minimize total inventory costs?

Given:
Annual Demand (D) 5,000
Ordering Cost per unit 49

Step 1 : Calculate the holding/carrying cost for each quantity

Discount Discount Price Holding Cost/Unit


1 5.00 1.00
2 4.80 0.96
3 4.75 0.95

Step 2 : Calculate EOQ for each quantity

Quantity 1 = √ 2(5,000)(49) / 1.00 = 700 cars ordered


Quantity 2 = √ 2(5,000)(49) / 0.96 = 714 cars ordered
Quantity 3 = √ 2(5,000)(49) / 0.95 = 718 cars ordered

Step 3: Calculate total cost for each quantity

Discount Discount Price Order Quantity Annual Product Cost


1 5.00 700 25,000
2 4.80 1,000 24,000
3 4.75 2,000 23,750

The Company should order 1,000 units to minimize total costs


tity discount schedule for the cars.

Annual Ordering Cost Annual Holding Cost Total Costs


350.00 350.00 25,700
245.00 480.00 24,725
122.50 950.00 24,823
Exercise 1

The D. Saelens Computer Corporation purchases 8,000 transistors each year for use in the minicomputer
The unit costs of each transistor is $10, and the cost of carrying one transistor in inventory for a year is $3
What is the optimal order quantity (EOQ).

Exercise 2

Annual demand for the notebook binders at Crone's Stationary Shop is 10,000 units. Heather Crone opera
300 days per year and finds that deliveries from her supplier generally take five working days. Calculate th
for notebook binders that she stocks.

Exercise 3

L. Alwayn Inc. has an annual demand rate of 1,000 units but can produce at an average annual production
Set up cost is $10, and carrying cost is $1.00. What is the optimal number of units to be produced each tim
(Note: You can use annual demand/production rate as a substitute for daily demand/production rate)
r use in the minicomputers its manufactures.
inventory for a year is $3. Ordering cost is $ 30 per order.

nits. Heather Crone operates her business


working days. Calculate the reorder point

average annual production rate of 2,000 units.


s to be produced each time?
and/production rate)

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