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

Ask an Expert

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

Write your message here..

Related Questions

Cost estimation, engineering method of cost estimation engineering method of cost estimation

Explain standard costing according to backer and jacobsen, Explain standard... Explain standard costing according to backer and Jacobsen According to backer and Jacobsen, standard cost is the amount the firm to measure the variation from standard costs th

Multiple products, differentiate between multiple product , selling cots an... differentiate between multiple product , selling cots and margin management

Advantages-disadvantages-standard costing, The advantages and disadvantages... The advantages and disadvantages of standard costing The benefits for controlling having a standard costing system in operation can be summed up as follows; Cautiously pl

Learning curve theory, LEARNING CURVE THEORY The first time a new opera... LEARNING CURVE THEORY The first time a new operation is performed both workers and operating procedures are untried but as the operation is replaced the workers becomes more fa

Orders per year , Lila Battle has determined that the annual demand for num... Lila Battle has determined that the annual demand for number 6 screws is 100,000 screws. Lila, who works in her brother's hardware shop, is in charge of purchasing. She estimates t

Budgets, Budgets An essential planning component is budgeting. Budgets ... Budgets An essential planning component is budgeting. Budgets sketch the financial plans for an organization. There are number of budget types. Operating Budgets -- A plan

Capital budgeting – planning investments, Project C would involve a current... Project C would involve a current outlay of $50,000 on equipment and $15,000 on working capital. The investment in working capital would be increased to $21,000 at the end of the f

What are the changing role of management accounting, What are the Changing ... What are the Changing role of management accounting 1. Focus on customer scarification: customer satisfactions are continuously gaining high priority in management thinking i

Differentail cost analyais, Differnetial cost analysis uses Differnetial cost analysis uses