Question

Each year, Florida's Best Salad Dressing, Inc. (FBSD) purchases 50,000 gallons of extra virgin

olive oil. Ordering costs are $95.00 per order, and the carrying cost, as a percentage of inventory

value is 80 percent. The purchase price to FBSD is $0.50 per gallon. FBSD’s management currently

orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a

quantity discount of $0.03 per gallon if FBSD orders 10,000 gallons at a time. What is the net benefit

in dollars if FBSD takes the discount?

Answer 1

Annual Demand = D = 50,000 gallons

Ordering cost = S = $95

Price = P = $0.50

Carrying cost = H = 80% = 80% * 0.5 = $0.4

Economic Order Quantity = EOQ = = = 4,873.397 = 4873.4 gallons

Total Annual cost = Annual Ordering cost + Annual Holding cost + Annual Purchase cost = = = 974.68 + 974.68‬ + 25000 = $26,949.36‬

Hence, Total annual cost for current EOQ ordering = $26,949.36‬

Now,

Q = 10000

P = 0.5 - 0.03 = $0.47

H = 80% * 0.47 = 0.376‬

S = $95

Total Annual cost = Annual Ordering cost + Annual Holding cost + Annual Purchase cost = = = 475 + 1,880‬‬ + 23,500‬ = $25,855‬

Hence, Total annual cost for current Q=10000gallons ordering = $25,855‬

The net benefit in dollars if FBSD takes the discount = Total annual cost for EOQ - Total annual cost for Q = 10000

Hence, net benefit = 26,949.36‬ - 25,855‬ = $1,094.36

The net benefit in dollars if FBSD takes the discount = $1094.36

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