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

Show danger of high financial gearing, Q. Show danger of high financial gea...

Q. Show danger of high financial gearing? A additional danger of high financial gearing is that a company may move into a loss-making position as a result of high interest paym

What is amount per share, Q. What is Amount per share? Par Value - Amou...

Q. What is Amount per share? Par Value - Amount per share set in ARTICLES OF INCORPORATION of a CORPORATION to be entered in CAPITAL STOCKS account where it's left permanently

Estimate tax rate and pre tax balance, Refer to Note 12, Employee Benefit P...

Refer to Note 12, Employee Benefit Plans and Other Postretirement Benefits (pp. 86-91) from the Consolidated Financial Statements of Harley-Davidson (hereafter HOG) 2008 Annual Rep

Relationship between cash or call asset-or-nothing, Options with discontinu...

Options with discontinuous payoffs are called Binary options. An example is the cash-or-nothing callwhich pays nothing if the stock price at the maturity of the option is below the

Statute of limitations, Statute of Limitations - This sets out the period w...

Statute of Limitations - This sets out the period within that actions may be brought upon claims or within which rights may be enforced. As it concerns to tax returns, statute of l

Annual Report, Before nominations for a board position should the annual re...

Before nominations for a board position should the annual report be available

Compute basic and diluted earnings per share, The following information was...

The following information was taken from the books and records of Ludwick, Inc.: 1. Net income $ 280,000 2. Capital structure: a. Convertible 6% bonds. Each of the 300, $1,000 bond

Other aspects of the consolidated balance sheet, OTHER ASPECTS OF THE CONSO...

OTHER ASPECTS OF THE CONSOLIDATED BALANCE SHEET The consolidated balance sheet may require a special approach under the following situations: 1) Pre-acquisition losses in subs

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