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- This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
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- August 10, 2017 at 7:43 am #401275
Dear Tutor,
I need a help from you
Question is as follows:
Watton ltd is a retailer of beer barrels. The company has an annual demand of 36,750 barrels. the barrels cost $12 each. Fresh supplies can be obtained immediately, but ordering costs and the cost of carriage inwards are $200 per order. The annual cost of holding 1 barrel in inventory is estimated to be $1.20. The Economic Order Quantity has been calculated to be 3500 barrels.
The suppliers introduce a quantity discount of 2% on orders of at least 5000 barrels and 2.5% on orders of at least 7500 barrels.
It is required to determine whether the least cost order quantity is still the EOQ of 3500 barrels.
As per Kaplan answer,Total costs of 3500 barrels are $445,200
Total costs of 5000 barrels are $436,650
Total costs of 7500 barrels are $435,455But, if I can’t understand why the discounts have not been calculated in the holding costs in Kaplan solution.
As per my calculations, after watching your videos, I get
$445,200, $436590 and $435342.50 respectively.
Can you please help me understanding where I got it wrong.
Kind Regards,
AshishAugust 10, 2017 at 4:25 pm #401364If you are given the holding cost in $’s then you assume that it is fixed at that amount and is not affected by quantity discounts.
It is only when the holding cost is given as a % of the purchase price that discounts affect it (because it the purchase price is lower, then the % holding cost will be lower).
August 10, 2017 at 7:57 pm #401402Thank you so much for the clarification John. You are of great help, specially for students like me, who are doing self study.
Thanks and god bless,
AshishAugust 11, 2017 at 6:19 am #401424You are welcome 🙂
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