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4.5.1 Example: Bulk discounts
The annual demand for an item of inventory is 45 units. The item costs $200 a unit to purchase, thenholding cost for 1 unit for 1 year is 15% of the unit cost and 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 90units or more.
Required
Calculate the cost-minimising order size.In the solution of this example in textbook (p.116).
I don’t understand the line which is Purchases (no discount) 45 x $200. Why dont we use EOQ=30 units instead of 45, sir? I’ve thought that is 30 units because it is the order quantity which minimises inventory costs.You do not say which textbook you are referring to 🙂
However, the EOQ is indeed 30 units each time when there is no discount, and this is relevant for calculation the holding cost per year and the order cost per year.
The cost of purchasing the goods over the year is 45 x $200 because on average they need to buy a total of 45 units each year and each unit costs $200.
We need this, because if they order 60 or 90 units each time then the total of the holding and ordering costs will be higher, but the total purchase cost will be lower because of the discount.
Have you watched my free lectures on this? I work through similar examples explaining what we do and why.
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