Question

Part A: Suppose Stanley's Office Supply purchases 90,000 boxes of pens every year. Ordering costs are $133.95 per order and carrying costs are $0.75 per box. Moreover, management has determined that the EOQ is 5,669.92 boxes. Note: The ordering costs and EOQ differ from problem 1. The vendor now offers a quantity discount of $0.06 per box if the company buys pens in order sizes of 10,000 boxes. Determine the before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.75 per box whether or not the discount is taken.) Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Part B: Use the data from problem 2 and a 365 day year. If the lead time for placing an order is 14 days, and Stanley's Office Supply holds a Safety Stock of 75 days Supply of Boxes of Pens, then at what inventory level in Boxes should an order be placed? Enter your answer rounded to two decimal places. For example, if your answer is 123.45% or 1.2345 then enter as 1.23 in the answer box

Answer 1

Part A)

Answer - Before-tax benefit of accepting the quantity discount = $4,696.89

Explanation -

EOQ = 5,669.92

Ordering Cost = ([A/EOQ]*O) = [90,000/5,669.92]*133.95 = 2,126.22

Inventory Cost = ([EOQ/2]*C) = [5,669.92/2]*0.75 = 2,126.22

Total cost = 2,126.22 + 2,126.22 = 4,252.44

Discount given -

EOQ = 10,000

Ordering Cost = ([A/EOQ]*O) = [90,000/10,000]*133.95 = 1,205.55

Inventory Cost = ([EOQ/2]*C) = [10,000/2]*0.75 = 3,750

Total cost = 1,205.55 + 3,750 = 4,955.55

If the discount is accepted, the order would be given for 10,000 units

Step 1) Savings in purchase = 90,000*0.06 = 5,400

Step 2) Difference in cost = 4,955.55 - 4,252.44 = 703.11

Therefore, before-tax benefit of accepting the quantity discount = 5,400 - 703.11 = 4,696.89

Part B)

Answer - Re-Order point = 21,945.20 units

Explanation -

A = 90,000

Lead Time = 14 days

Safety Stock = 75 days

Re-Order point = [A*Lead time/365] + [A*Safety Stock/365]

= [90,000*14/365] + [90,000*75/365]

= 3,452.05 + 18,493.15

= 21,945.20 units.

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