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If the EOQ calculated falls within the discount range….what has to be done?
Please solve this question as an illustration:
A company has a demand for 45,000 components pa, which cost $4.50 each. Ordering costs amount to $100 per order. Annual cost of holding one component in inventory is $0.65.
A 0.5% discount is available on orders of at least 3,000 components and 0.75% on 6,000 components or more.Calculate the optimal order quantity.
You calculate the EOQ ignoring discount first of all.
If the EOQ falls inside a discount band, then you recalculate it, taking account of the discount (it will be slightly different).
You then cost out at the new EOQ, and also at the levels at which you first get higher discounts. The cheapest of these is the best.
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can some tally my answers for the 3 calculations
EOQ 3000 6000
Holding Cost 2418.65 975 1950
Ordering cost 1209.35 1500 750
Purchase Cost 202500 201600 201150
206128 204075 203850
6000 being the cheaper option- Topics: 0
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didnt post the way i typed it well the values are for EOQ – 3000 – 6000 respectively
6000 is the cheaper option.
However, you have not read the answer to the first question properly.
The EOQ ignoring the discount is 3721. Assuming the cost of holding inventory stays at 0.65, then all you need to cost out is at 3721 and at 6000.
The purchase cost at 3721 is 201600 (because they will be getting the discount).
Demand for x,y,z ranges from 1000-3000 units
semi anual carrying cost 2%
raw materials per units of finished goods 2kg
ordering cost per order #100
purchase price per unit of input 150kg
then at the end they grant the company 6% discountefe jane:
I am sorry but I don’t know what you are asking.
What is your question (and then I will try and answer 🙂 )while solving I am getting purchase price as 201487.5$ at Q=3721.
How come you are getting 201600? i dont even get it after rounding off.
Kindly replyYou are correct, it is 201487.5
I don’t know where I got 201,600 from – I must have been tired when I answered the question before 🙁
Hi I have a question. The annual demand for an item of inventory is 45 units. The item costs $200 a unit to purchase, the holding cost for 1 unit for 1 year is 15% of the unit cost and the ordering costs are $300 an order. The supplier offers a 3% discount for orders of 60 units or more and a discount of 5% for orders of 90 units or more. Calculate the cost-minimizing order size.
Please – this forum is not for you to write up a full question and expect me to write up a full answer.
If you have watched my free lecture on here, then most of it should not be a problem.
If you say which part caused you a problem then I will happily sort it out for you.As always with discounts, you should first calculate the EOQ using the formula (you should get 30 units).
Then cost out at the EOQ, and the levels at which you first get a discount (60 and 90) and choose the cheapest.
You should get a total cost at 30 units of $9,900; at 60 units of $9,828, and at 90 units $9,982.5So 60 units is best.
Thank you very much sir, and I do apologize, for typing the entire question I did calculate the EOQ and arrived at 30 units but I became lost after. Thank you again. Its clear now
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