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

Pre-acquisition losses in subsidiary company, Pre-acquisition losses in sub...

Pre-acquisition losses in subsidiary company on date of acquisition If the subsidiary company has a loss on the date of acquisition i.e. a debit balance in the retained profits

Process to increase the financial health of company, Process to increase th...

Process to increase the financial health of company Financial affairs of a limited company enter public domain. With exception of small companies, there is also a requirement f

Consignment, A of Surat consign goods to B of Jaipur to be sold at or abov...

A of Surat consign goods to B of Jaipur to be sold at or above invoice price. B is entiled to get a commission of 8% on sales at invoice price plus 25% of any surplus price reali

Partnership amalgamation, how to prepare the accounts when goodwill is not ...

how to prepare the accounts when goodwill is not to be maintained in the books

Receiver appointed by court-bankruptcy and liquidation, Receiver appointed ...

Receiver appointed by court If appointed by the court, the receiver must give security as directed by the court. The following notification must be given: (a) The debenture h

Definition of bankruptcy, DEFINITION OF BANKRUPTCY Bankruptcy is another ...

DEFINITION OF BANKRUPTCY Bankruptcy is another key area of accounting . The issues addressed here deal with the properties of an individual (a sole trader or partner in a partner

Discuss limitations of ratio analysis, Question : Financial analysts wi...

Question : Financial analysts will use ratios to compare performance of companies in the same industry. Lenders will frequently use ratio analysis to help them decide whethe

Accumulated Depreciation, The office building was bought in January 1, 2011...

The office building was bought in January 1, 2011 and was originally planned to be used for 40 years and had no salvage value. It is depreciated on a straight line basis. Now in

Stockholder''s equity, 1. Lett Corp declared and issued a 15% stock dividen...

1. Lett Corp declared and issued a 15% stock dividend when they had 100,000 shares of common stock issued and outstanding. The market price of the stock was $20 per share on the de

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