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

Statement of cash flow, under gaap, are proceeds from capital lease obligat...

under gaap, are proceeds from capital lease obligation reported in the statement of cash flow and why

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

ACCRUED INTEREST, IF I HAVE A LOAN AND ACCRUED INTEREST .THEN ACCRUED INTER...

IF I HAVE A LOAN AND ACCRUED INTEREST .THEN ACCRUED INTEREST GOES ON WHICH SIDE- DEBIT OR CREDIT ?

Transactions affecting retained earnings, shown below in T-account format a...

shown below in T-account format are the changes affecting the retained earnings of Brenner-Jude Corporation during 2011. At January 1,2011, the corporation had outstanding 105 mill

ACCOUNTING THEORY, HOW DOES ACCOUNTING THEORY INFLUENCE ACCOUNTING POLICY M...

HOW DOES ACCOUNTING THEORY INFLUENCE ACCOUNTING POLICY MAKING

Principles of banking and finance, Q. Principles of banking and finance? ...

Q. Principles of banking and finance? An introduction to the principles of banking and finance. It covers a broad variety of topics using an economic perspective and aims to gi

Statement of owner''s equity , Prepare an income statement and statement of...

Prepare an income statement and statement of owner's equity  (month ended Mar,31 1995) Auto remair fee earned            37,300 Salaries Expense                    11500 Repair par

What will be the percentage of return on investment, 1. A stock sells for $...

1. A stock sells for $10 a share. you purchase 100 shares for $1000 and after a year, the prices rises to $17.50. What will be the percentage of return on your investment if you bo

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

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