BULK DISCOUNTS

BULK DISCOUNTS

1. The annual demand for an item of inventory is 45 units. The item costs Rs. 200 a unit to purchase. The holding cost for one unit for one year is 15% of the unit cost and ordering costs are Rs. 300 an order. The supplier offers a 3% discount for orders of 60 units or more and a discount of 5% for orders of 90 units or more.

   • Step 1. Calculate the EOQ
     • The EOQ, ignoring discounts, is : 30units EOQ = root of [ (2 * Ordering costs * Annual Demand) ÷ Holding costs]
   • Step 2. Calculate the total cost of the EOQ units. The total cost is Rs.9,900 (Total Cost = Purchase Price + Holding cost + Ordering costs)
     • Purchase Price is (45 units x Rs. 200) = Rs. 9,000
     • Calculate the Holding cost of the EOQ units
       • Holding Cost is Rs. 450 (Holding Cost = Average Inventory * Holding cost per unit)
         • Average Inventory is Rs. 15 units. ( Average Inventory = Order quantity ÷ 2) (i.e assuming no safety inventory )
         • Holding Cost per unit is Rs. 30 (=15%*Rs.200)
     • Calculate the ordering costs of EOQ units
       • Ordering costs is Rs.450 (Ordering costs = Number of orders * Ordering cost per an order) (= 1.5 Orders * Rs. 300)
         • Number of orders are 1.5 Orders ( Number of orders = Annual demand ÷ order quantity)
   • Step 3. Calculate the total cost with the 3% discounts
     • Total Cost is Rs.9,828 (=Purchase price+ Holding costs+ Ordering costs)
       • Purchase Price is Rs. 8,730 (9,000*97%)
       • Holding Cost is Rs. 873 (30 units * Rs. 29.10
         • Holding Cost per unit of inventory of annum is Rs. 29.10 (= 15%*97%* Rs. 200)
         • Average Inventory is 30 units (=60÷2)
       • Ordering costs is Rs.225 (0.75 orders * Rs.300)
   • Step 4. Calculate the total cost with the 5% discounts
   • Step 4. Compare the cheapest cost
     • Total Cost without discounts is Rs. 9,00 (as per the step 2)
     • Total Cost with the 3% discounts is Rs. 9,828 (as per the step 3)
     • Total Cost with the 5% discounts is Rs. 9,982.5 (as per the step 4)