Question

If annual demand = 2000, order cost = $50, annual holding cost rate = 15%, and the purchase price = $25 for orders of less than 1000 units, or $15 for orders of 1000 units or more, should you take the discount? Also, What is the minimum total cost?

a. Yes -- $31,225
b. No -- $43,280
c. No -- $50,867
d. Yes -- $38,477

Answer 1

Main Answer:

Yes, you should take the discount. The minimum total cost is $31,225.

Step-by-step explanation:

To determine the minimum total cost, we need to compare the total cost of ordering with the discount to the cost without the discount. The total cost (TC) is given by the sum of ordering cost (OC) and holding cost (HC). With the discount, the purchase price is $15 for orders of 1000 units or more. Using the Economic Order Quantity (EOQ) formula, we find the optimal order quantity. For orders of 1000 units or more, the order cost is $50. The holding cost is calculated using the annual holding cost rate of 15%.

Without the discount, the purchase price is $25 for orders of less than 1000 units. By comparing the total costs for both scenarios, it is evident that taking the discount results in a lower total cost of $31,225, making it the cost-effective choice.