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
The least-cost method The process is described as follows: Assign as much as possible to the variable with the least unit cost in the whole tableau. (Ties are broken randomly).

given the above data what would the breakeven in units and dollars be if u wanted a necessary after tax profit of $ 36,000 (assume a 30% tax rate ) units __________ ales dollars _

Define the Balanced Score Card? 1. Distinguish between standard control and budgetary costing. 2. Define the ‘Balanced Score Card? Explain the steps in implementing ‘Balance

Explain the terms - Cost object and Activities Cost object : it is an item for which cost measurement is required for example a product or a customer. Activities: these c


Explain the techniques of performance budgeting It will also be useful to examine the three major aspects of this technique: Structural aspects : the structural aspects inv

Production As you would suspect, effectively directing an organization needs prudent management of production. Because this is a hands-on process, and often entails dealing wit

Explain product cost Product costs are those costs which are associated with and directly identifiable with the product. In other words, which are assigned to the product are p

Advantages of Simulation 1) It can be used in areas where analytical techniques are not available or would be too complex. 2) Constructing the model inevitably must involve

Winner says, "It is clear that in decades to come a great many things like telephone answer machines and automatic bank tellers will become, in effect, members of our society." Mor