Question

A restaurant has been ordering seafood mix from a supplier in Cape Town at a rate of 120000 units per year at a price of R50 per unit. The ordering cost is R66 and the holding cost per unit per year is R18. The restaurant has received a quantity discount of 10% on orders of 1400 units or more from their supplier. On the basis of total inventory costs, should the restaurant take advantage of the discount?

Answer 1

The restaurant should take advantage of the quantity discount to lower its total inventory cost.

Step-by-step explanation:

To determine whether the restaurant should take advantage of the discount, we need to compare the total inventory costs with and without the discount. Without the discount, the restaurant would order 120,000 units per year at a price of R50 per unit. The ordering cost is R66 and the holding cost per unit per year is R18. So, the total annual inventory cost without the discount would be:

Total Cost = (Ordering Cost + Holding Cost) * Number of Units

Total Cost = (R66 + R18) * 120,000

Total Cost = R8,520,000

With the discount, the restaurant would order 120,000 units at a price of R45 per unit. The total annual inventory cost with the discount would be:

Total Cost = (Ordering Cost + Holding Cost) * Number of Units

Total Cost = (R66 + R18) * 120,000 * 0.9

Total Cost = R7,668,000

Comparing the two total costs, we can see that taking advantage of the discount would result in a lower total inventory cost for the restaurant. Therefore, the restaurant should take advantage of the discount.