Question

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? Enter your answer rounded to two decimal places.

Answer 1

ANSWER

EOQ = (2*Annual demand*order cost/annual carrying cost per unit)^0.5

= (2*50,000*$80/$0.50*80%)^0.5

= 4,472.13

Total costs when EOQ = 4,472.13 will be = ordering costs + carrying costs + cost of purchase

Ordering cost = 50,000/4,472.13* $80= $894.43

Carrying costs = (4,472.13/2*(0.5*80%)) = $894.43

Costs of purchase = 50,000*0.5 = $25,000

Thus total costs = 894.43+ 894.43+ 25,000 = $26,788.86

Now in case when 10,000 gallons are ordered at a time:

Ordering costs = 50,000/10,000*$80 = $400

Carrying costs = (10,000/2)*((0.5-0.03)*80%) = 1,880

Costs of purchase = 50,000*(0.5-0.03) = $23,500

Thus total costs = 400+1880+23500 = $25,780

Thus net benefits in dollars = $26,788.86- $25,780

=$ 1,008

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