Question

1. The annual demand for a certain product sold in a department store is 1,000 units. Ordering cost per order is $50, holding rate is 40%, and unit cost is $200. The department store currently is ordering every two months, but now is offered the following quantity discount scheme: For an order of up to 99 units no discount. For an order up to 699 units-a discount of 25%, and for a larger order -a discount of 30%.
   1. What is the order size that minimizes the store’s inventory cost under the discount scheme? Show the calculation of the minimum total cost for the range you selected as optimal  
   2. The seller is willing to change the discount of the third discount range to convince the buyer to increase his order above what you found in part ‘a’. What is the discounted price that may convince the department store to increase its order size, above the order you found in part ‘a’? Use the template. Accuracy of 2 decimals is enough.
   3. Would the store qualify for any discount under the current ‘2-month ordering’ policy? If so, which discount?
      1. No discount
      2. 25% discount
      3. 30% discount
      4. Can’t answer, because Q is unknown

Answer 1

Economic Order Quantity refers to the number of unit the company should add to the inventory and the production is made to minimize the total inventory cost. It maintain a balance between setup costs and carrying costs.

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