Question

Meena Distributors has an annual demand for an airport metal detector of 1 comma 360 units. The cost of a typical detector to Meena is ​$400. Carrying cost is estimated to be 18​% of the unit​ cost, and the ordering cost is ​$23 per order. If Purushottama Meena​, the​ owner, orders in quantities of 300 or​ more, he can get a 9​% discount on the cost of the detectors. Should Meena take the quantity​ discount? What is the EOQ without the​ discount?

Answer 1

1. Meena should take the quantity discount since with such discount the EOQ will rise by just 1 unit from 20.5units to 21.5 units and a net gain of $49.18.

2. The EOQ without discount will be 20.5 units

Step-by-step explanation:

EOQ=Square root of ((2xordering cost x demand)/ (Carrying cost))

Gains of accepting discount will be

i. ordering cost savings= (demand/quantity order) x ordering cost

= (660/360)*23=$42.16

ii. Price saving per item=0.18 x 660 =$118.80

total gain =$160.96

iii. Stockholding cost =300 x (23 x 0.91 ) x 0.18=$1,130.22

iv. Additional cost incurred by increasing order= 1,130.22-(300 x 23 x0.18)

=$111.78

Net gain= 160.96-111.78

= $49.18