EOQ Model with quantity discounts

Circumstances frequently occur where firms are able to obtain quantity discounts for large purchase orders. Buying in bulkiness has some merits and demerits.

Advantages:

(i) A saving in purchase rule decreases in unit cost, which consists of the total amount of discount for the period.

(ii) A reduction in the total ordering costs because fewer orders are placed to take advantages of the discounts.

Disadvantages:

Increased holding cost arising from higher stock levels when large quantities are purchased. Like:

•    Stock out cost
•    Insurance
•    Deterioration
•    Security etc.