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 break-point of the third discount range to convince the buyer to increase his order above what you found in part ‘a’. At which break point the department store may decide to increase its order size above the order you found in part ‘a’? Assume that only integer break points are allowed (for example 300, 301, 302,…). Use the template.
   3. Would the store qualify for any discount under the current ‘2-month ordering’ policy? If so, which discount?
      1. No discount
      2. 20% discount
      3. 30% discount
      4. Can’t answer, because Q is unknown

Answer 1