Uppose stanley's office supply purchases 50,000 boxes of pens every year. ordering costs are $100 per order and carrying costs are $0.40 per box. moreover, management has determined that the eoq is 5,000 boxes. the vendor now offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes. determine the before-tax benefit or loss of accepting the quantity discount. (assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)
The Before Tax benefit = 500 USD
Purchase = 50,000 boxes
Ordering Cost = 0.40 USD per box
EOQ = 5000 boxes = Economic Order Quantity
Vendor Offer = 0.02 USD per Box for the order size of 10,000 boxes.
Our EOQ is 5000:
So, first find costs associated without the offer.
Ordering Cost = (50000/5000) x 100 = 1000 USD
Carrying Cost = (5000/2) x 0.4 = 1000 USD
Total cost before accepting the offer = 1000 + 1000 = 2000 USD
Now, let's find the costs associated with offer accepted.
Ordering Cost = (50000/10000) x 100 = 500 USD
Carrying Cost = (10000/2) x 0.4 = 2000 USD
Total Cost = 2500 USD
Cost Saved from Discount = 50000 x 0.02 = 1000 USD
So, Total after accepting the offer = 2500 USD - 1000 USD
Total after accepting the offer = 1500 USD
So, the Before Tax benefit = 500 USD
The company will save $10,500 every year.
Giving the following information:
Supply purchases 50,000 boxes of pens every year.
Ordering costs are $100 per order.
Carrying costs are $0.40 per box.
Management has determined that the EOQ is 5,000 boxes.
The vendor now offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes.
Cost per order 1= 5000*0.40 + 100= $2,100
Total cost= 2,100* 10= $21,000
Cost per order 2= 10000*0.40 + 100 - 10000*0.2= 2,100
Total cost= 2,100*5= $10,500
We don't have any information on the cost of having inventory. It is cheaper to make bigger orders and save money ordering costs and take advantage of the discount.