The case of a fixed discount-discount structures, Managerial Accounting

The case of a fixed discount

When evaluating inventory decisions when a fixed discount rate exists, the appropriate procedure is to compare the total costs of the EOQ with the total costs when discounts are taken. The option giving lower costs is then chosen.

Note: The Unit (variable) cost (i.e. Purchase Price) behaves in the following manner.

C = Co        if    0 ≤ Q ≤ Qb
Co (1 - P)    if    Q ≥ Qb


Where:

Co = basic unit cost without a discount
P = Discount rate allowed.
Qb = Break-point (Quantity) - where discounts become operational.

In order to determine the optimal ordering quantity, it is necessary to include the costs of the inventory with the carrying ordering costs.

Total costs of Inventory = Total Purchase cost + Total order cost + Total carrying cost

TC = DCo + (Q*/2) H + Do/Q2                  If 0 ≤ Q ≤ Qb   
TC = DC. (1 - P) + (Q/2) H + Do/Q            If Q ≥ Qb   

                               
Note:

The second equation i.e. with discounts will give a lower TC than first equation for the same. The decision whether to go for the discount lies on a trade-off between extra carrying costs vs. a decrease in acquisition costs.

Posted Date: 12/6/2012 6:17:27 AM | Location : United States







Related Discussions:- The case of a fixed discount-discount structures, Assignment Help, Ask Question on The case of a fixed discount-discount structures, Get Answer, Expert's Help, The case of a fixed discount-discount structures Discussions

Write discussion on The case of a fixed discount-discount structures
Your posts are moderated
Related Questions

Please help me with these problems Merry -Go -Around (MGR) a clothing retailer located primarily in shopping malls, was founded in 1968. By the early 1990s, the company had gon

Weldon Industrial Gas Corporation supplies acetylene and other compressed gases to industry. Data regarding the store''s operations follow: 500 Garrison, Managerial Accounting, 12t

Carrying costs of inventory These are costs incurred because the firm has decided to maintain inventories. They generally consist of: •    Stock-out costs •    Insurance co

Managerial Accounting Before going to Managerial Accounting let us discuss a bit about Financial Accounting. Financial accounting is concerned with reporting to the external pa

What is Programmer budgeting It is a combination of programming and systems refers to the activity and system analysis refers to cost benefit analysis or operations research. I

PERMANENT ABANDONMENT OF PREMISES A company may find it more profitable to concentrate its output in some factories by closing down others.  The decision, in this instance, is

The decisions about long-term investment are depends on judgments on future cash flows, the improbability of such cash flows and the opportunity cost also of the funds to be invest

Question 1: (a) Use indifference curves to distinguish between income and substitution effects. (b) Hence, using the above techniques explain why the demand curve slope down

Application of Information technology in respect of management information system