Question

the KIA company needs 6000 car tires per year. the ordering cost for these is 120$ per order and the holding cost is assumed to be 50% of the per unit cost. in orders of less than 225 tires cost $80. for orders of 225 or more, the cost drops to $70 per unit. should KIA take advantage of the quantity discount?

Answer 1

Yes, KIA should take advantage of the quantity discount.

For example: If 225 quantity ordered, per unit is 121, if quantity is increased to 226 or higher, per unit cost drops. This is due to fixed cost is ver small and variable cost drops from 80 per tire to 70 per tire and also holding cost is 50% of cost of tire which also drops as cost is reduced.

Quantity per order-->	225	226	450	6000
order cost	120	120	120	120
cost of tires (80 & 70 per unit)	18000	15820	31500	420000
holding cost (50% of cost)	9000	7910	15750	210000
Total cost	27120	23850	47370	630120
Per unit cost	121	106	105	105