Question

In: Advanced Math

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

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

olive oil. Ordering costs are $80.00 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?

Solutions

Expert Solution

EOQ=

     =  

    =

    =

   =4472.13

NO OF ORDERS=50000/4472.13

                         =11.18

TOTAL COST=(50,000/4472.13)($80)+($10,000/2)($0.50)(0.80)

                            =(11.18)(80)+(5000)(0.4)

                            =894.4+2000

                              =$2894.4

iF THE FIRM ORDER 10,000 GALLONS AT A TIME

TC=(50,000/10,000)($80)+($10,000/2)($0.47)(0.80)

     =(5)(80)+(5000)(0.376)

     =400+1880

   =$2280

THEREFORE COST INCREASE BY 2280-2894.4=-614.4

THE BENEFIT IS (0.03)(50,000)=$1500

Thus the NET BENEFIT =$1500+$614.4=$2114.4


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