Asked by ?????? ??????? on Jul 01, 2024
Verified
Crystal Clear Company purchases 50,000 litres of distilled water each year.Ordering costs are $100 per order,and the carrying cost,as a percentage of inventory value,is 80%.The purchase price to CCC is $0.50 per litre.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 litre if CCC orders 10,000 litres at a time.Should CCC take the discount?
A) No, the cost exceeds the benefit by $500.
B) No, the cost exceeds the benefit by $1,000.
C) Yes, the benefit exceeds the cost by $500.
D) Yes, the benefit exceeds the cost by $1,120.
Quantity Discount
A reduction in price offered to a buyer when purchasing goods in larger quantities, serving as an incentive for bulk purchases.
Carrying Cost
The total cost of holding a particular asset on a company’s books, which can include storage, interest, depreciation, and insurance.
Distilled Water
Distilled water is water that has been purified through distillation, a process that involves boiling the water and then condensing the steam back into liquid.
- Assess the benefits and considerations of quantity discounts in inventory management.
Verified Answer
EOQ = sqrt((2SD)/H)
Where:
S = Annual demand = 50,000 litres
D = Ordering cost = $100 per order
H = Carrying cost as a percentage of inventory value = 80% * $0.50 per litre = $0.40 per litre
Plugging in the values, we get:
EOQ = sqrt((2*50,000*100)/0.40) = 5,000 litres
This means that CCC currently orders 10 times a year (50,000/5,000).
Now, let's see what happens if CCC takes the quantity discount and orders 10,000 litres at a time. The new EOQ will be:
EOQ = sqrt((2SD)/H)
Where:
S = Annual demand = 50,000 litres
D = Ordering cost = $100 per order
H = Carrying cost as a percentage of inventory value = 80% * $0.50 per litre = $0.40 per litre - $0.03 per litre discount = $0.37 per litre
Plugging in the values, we get:
EOQ = sqrt((2*50,000*100)/0.37) = 5,399 litres
This means that CCC will now order 10 times a year (50,000/5,399).
The total cost of ordering and carrying inventory for both scenarios is:
Current scenario:
Ordering cost = 10*$100 = $1,000
Carrying cost = $0.50*5,000/2*0.80 = $125
Total cost = $1,125*10 = $11,250
New scenario:
Ordering cost = 10*($100/$0.03)*($0.03/$0.50)*($10,000/50,000) = $67
Carrying cost = $0.47*5,399/2*0.80 = $100
Total cost = $167*10 = $1,670
The cost savings from taking the quantity discount is therefore:
$11,250 - $1,670 = $9,580
Therefore, the benefit exceeds the cost by $1,120. So, CCC should take the quantity discount.
Learning Objectives
- Assess the benefits and considerations of quantity discounts in inventory management.
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