Example of quantity discounts, Finance Basics

Example of Quantity Discounts

Consider illustration one and suppose that a quantity discount of 5 percent is given whether a minimum 200 units is ordered.

Required

Find out whether the discount should be in used and the quantity to be ordered.

Suggested Solution

We require considering the saving in purchase costs; savings in ordering costs and rise in holding costs.

Savings in purchase price:

New purchase price                                =       50 x 95% = Sh.47.50 per unit

Savings in purchase price per unit           =       50 - 47.50

                                                            =       Sh.2.50

Total units per year                                =       2,000

Total savings                                         =       2,000 x 2.50

                                                            =       Sh.5,000

Savings in Ordering Cost

Assuming an order quantity of 200 units per order, the total ordering cost will be:

= (2,000/100) * 50

= Sh.500

Ordering cost if 100 units is ordered

(2,000/100) * 100

= Sh.1, 000

Consequently savings in ordering costs = 1,000 - 500 = Sh.500

Increase in holding costs

Holding cost if 200 units are ordered

½(200)19.75 = Sh.1, 975

Holding costs if 100 units are ordered

½(100(20) = Sh.1, 000

Increase in holding costs = 1,975 - 1,000 = Sh.975

The Net Effect therefore:

                                                     Shs.

Savings in purchases costs              5,000

Savings in ordering costs                   500

Total savings                                 5,500

Less increase in holding costs             975

Net savings                                    4,525

2433_Example of Quantity Discounts.png

2106_Example of Quantity Discounts 1.png

Cn = 15 + 10% x 4.75 = Shs.19.75

The discount should be taken because the net savings is positive.  To determine the number of units to order we recomputed Q with discount Qd.

= 100.6 units

Decision rule:

Order the minimum discount quantity if Qd < minimum discount quantity.

Order Qd if Qd < minimum discount quantity.

Posted Date: 1/31/2013 11:59:12 PM | Location : United States







Related Discussions:- Example of quantity discounts, Assignment Help, Ask Question on Example of quantity discounts, Get Answer, Expert's Help, Example of quantity discounts Discussions

Write discussion on Example of quantity discounts
Your posts are moderated
Related Questions
Investment Opportunity and Capital Structure Investment Opportunity Lack of suitable investment opportunities, that is so, by positive returns or N.P.V., may encourage a

give an introduction about stock exchage in india,,includig BSE

Determinants of Required Rate of Return 1.Risk free rate - This is the interest rate such would exist on default free securities like Treasury bills and bonds. Risk free

evaluate the importance of leverage in financial management of a small scale company

jack needs to borrow $1000 for the next year. Bank south will give him the loan at 9%. Suncoast will give him the loan at 7% with a $50 loan orgination fee. First national will giv

A bondholder buys a bond maturing in two years for Rs. 120 and earns Rs.15 per annum as interest. His YTM is ______ %.

Access to Capital Markets and Ownership Structure  Ownership Structure A dividend policy may be driven with Time Ownership Structure as like in small firms whereas manage

Importance of Working Capital Management The finance manager must understand the management of working capital since of the following purpose: a) Time devoted to working c

Explain about the monetary role of banks. The Monetary Role of Banks: • A bank is a financial intermediary. • Bank reserves are the currency banks hold within their va

Conduct research and explain the companies, their operations, locations, markets, and lines of business. Collect financial statements for the past three years, fiscal or calendar .