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.
Find out whether the discount should be in used and the quantity to be ordered.
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
Total units per year = 2,000
Total savings = 2,000 x 2.50
Savings in Ordering Cost
Assuming an order quantity of 200 units per order, the total ordering cost will be:
= (2,000/100) * 50
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:
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
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
Order the minimum discount quantity if Qd < minimum discount quantity.
Order Qd if Qd < minimum discount quantity.