Quality discount and order quantity, Financial Accounting

Assignment Help:

The standard EOQ analysis is depends on the assumption which the price per unit keeps constant irrespective of the size of the order. While quantity discounts are obtainable, that is often the case; the price per unit is affected through the order quantity. That violates the applicability of the EOQ formula. Although, the EOQ framework can still be employed as a starting point for analyzing the problem. To find out the optimal order size while quantity discounts are available the subsequent procedure may be used:

1) Find out the order quantity using the standard EOQ formula by assuming no quantity discount, name as Q*.

2) If Q* facilitates the firm to find quantity discount so it represents the optimal order size.

3) If Q* is less than the minimum order size needed for quantity discount (name as Q′) compute the change in profit as a effect of increasing the order quantity from Q* to Q' given as:

2046_Quality Discount and Order Quantity.png

Here 

Δπ  = change in profit.

 U    =   annual usages/demand

D    =   discount per unit when quantity discount is available

Q*  =   economic order quantity assuming no quantity discount

Q′  =   minimum order size required for quantity discount

F    =   fixed cost of placing an order

P    =   unit purchase price without discount

C    =   inventory carrying cost expressed as a percentage.

Well at the right-hand side of the equation, the initial term presents savings in price, the next term shows savings in ordering cost and the third term shows the raise in carrying cost.

4) If the change in profit is positive, Q′ shows the optimal order quantity. Whether the change in profit is negative, Q* shows the optimal order quantity.

To demonstrate the above process, see the subsequent data pertaining to Quantum Ltd.

U = annual usage=10,000 units

F  =  foxed cost per order =Rs. 150

P  = purchase price per unit =Rs. 20

C = carrying cost=25% of inventory value

Q′ = minimum order size required for quantity discount=1,000 units

D = discount per unit =Re.1.

The EOQ by assuming no quantity discount:

1197_Quality Discount and Order Quantity1.png

= 75 units

As Q* is less than Q′ (1,000), the change in profit as a effect of raising the order quantity from Q* to Q′ is as:

915_Quality Discount and Order Quantity2.png

= 10,000 ×1 + [ (10,000/775) - (10,000/1,000) ] 150 - [((1,000(20 -1) 0.25)/2) - ((775 ×20 ×0.25)/2)]

= 10,000 + 435 - (2,375 - 1,938)

= Rs. 9,998.

As the change in profit is positive, Q′=1,000 shows the optimal order quantity. This must be noted that the above procedure is depends on the principle of marginal analysis.  This involves comparing incremental benefits along with incremental costs in moving from one level of inventory to the other.  This principle may be used to as a given order quantity along with the present order quantity and more generally for comparing any set of alternatives.


Related Discussions:- Quality discount and order quantity

Accounting for lease, what are the concept of economic substance over legal...

what are the concept of economic substance over legal form under accounting for lease?

Depriciation , an asset has a useful life of 4 years.If it is depriciated b...

an asset has a useful life of 4 years.If it is depriciated by diminishing balance method.Its book value at the end of 4 years is 24% of its original cost.Hence the rate of depricia

Selling Price of a callable bond, How do I compute the selling price of a c...

How do I compute the selling price of a callable bond? I have the bond selling price if it isn''t callable, but I don''t know how the callable feature impacts the price.

Compare solvency of the two company, $in million Pepsi Coca cola Net c...

$in million Pepsi Coca cola Net cash provided by operating activities $6,796 $8,186 Average current liability 8,772 13,355 Average total liability 22,909 21,491

#title Accounting.., The business changed their policy with regards to the ...

The business changed their policy with regards to the profit mark-upfrom 2018 to 2019 financial year. What was the changed.

VAT, EXAMPLES OF HOW VAT SYSTEM WORKS

EXAMPLES OF HOW VAT SYSTEM WORKS

Fin 501, Look closely at the stock market in Fiji. Do a trend analysis of t...

Look closely at the stock market in Fiji. Do a trend analysis of the stock market based on the following: ? The function of the stock market ? The trend analysis of the number of

Personal property, Personal Property - Movable property which isn't affixed...

Personal Property - Movable property which isn't affixed to land (REAL PROPERTY). Personal property comprises tangible items likecars, cash and computers and intangible items, like

Assignment, Can you do the attacched quections by Monday?

Can you do the attacched quections by Monday?

Periodic inventory system, Under this system all stock levels are reviewed ...

Under this system all stock levels are reviewed after fixed time duration, depending upon the significance of the item. Imported items may need a shorter review cycle, while slow m

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd