Hi Sir. I have a question relating to materials.
Sally has demand for a product at 40,000 units p.a. and the purchase price of each unit is $25. There are ordering costs of $30 for each order placed. Inventory holding costs amount to 10% p.a. of inventory value. It is determined that the EOQ is 800 units.
What is the savings on total cost assuming a discount of 1% on purchase price is given for all orders above 5,000 units?
A. $6,072.50
B. $10,000
C. $3,927.50
D. $1,260
Answer: A
With 5,000 units per order, there will be 8 number of orders
So, holding cost = 5,000 / 2 x $25 x 10% x 99% = $6,187.50
Ordering cost = 8 orders x $30 per order = $240
Purchase cost = 40,000 x $25 x 0.99 = $990,000
Total cost = $996,427.50
With 800 units per order, there will be 50 number of orders
Holding cost = 800 / 2 x $25 x 10% = $1,000
Ordering cost = 50 orders x $30 = $1500
Purchase cost = 40,000 x $25 = $1,000,000
Total cost = $1,002,500
Savings = A. $6,072.50
But, sir, what I need to help with is why at 5,000 units they include the discount? Shouldn't it be above 5000 units? SO shouldn't we find savings when there is 5,001 units per order and compare with the EOQ of 800 units per order?
Thank you sir :)
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Materials - savings when there is discount on purchase price
8y ago#1Strictly you are correct and the question should have been worded as 'a discount of 1% on purchases price is given for all orders of 5,000 or more'.
However, even so, if you do it for 5,001 units, then although the saving will be slightly different, the difference is only small and the only possible answer to choose of the four available is still going to be A.
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