EDP Associates, a small data processing company, is a wholly owned subsidiary of Norbrook Inc. EDP Associates provides data processing services to the parent company and many small outside businesses. Bill Kamp, President of EDP Associates, employs a small staff to conduct the data processing activities of the company.

Waring Paper Products, a regional distributor of paper products, has proposed a quantity discount on one type of computer paper purchased by EDP Associates. Kamp currently pays \(\$ 12\) per carton for this paper and uses 15,000 cartons of the paper annually. Waring has offered a \(5 \%\) cash discount on all quantity orders in excess of 1,000 cartons, (i.e., Kamp would pay the full price of \(\$ 12\) per carton on the first 1,000 cartons and the price on any cartons ordered in excess of 1,000 would be \(\$ 11.40\) each).

Kamp believes that any opportunity to save money would be worthwhile and is considering ordering larger quantities of paper to take advantage of the quantity discount. He has contacted John Barzoni in the controller's office of Norbrook for advice. Barzoni cautions Kamp not to act too quickly in taking the quantity discount. Barzoni points out that there are other relevant costs which must be considered before a decision is made regarding the optimum order quantity of computer paper. He indicates that the order quantity that will minimize the following cost formula must be determined.

\(\mathrm{Q}=\) quantity ordered at one time \(\mathrm{P}=\) purchase price of a carton of paper \(\mathrm{O}=\) cost of placing an order \(\mathrm{C}=\) annual cost of carrying one carton in inventory Together Kamp and Barzoni have been able to determine cost factors which may have an effect on the total inventory related costs. They are as follows:
(i) The cost to place an order is \(\$ 64.80\).
(ii) Imputed interest cost of inventory is \(15 \%\) of the purchase price per carton.
(iii) Inventory storage cost is \(5 \%\) of the purchase price per carton.
{Required:}

(a) Compute the optimum number of cartons of paper EDP Associates should be ordering currently without consideration of the quantity discount.

(b) Explain what effect the quantity discount offered by Waring Paper Products will have on the total cost of computer paper to EDP Associates.

(c) 1. Explain how EDP Associates should proceed to determine the economic order quantity when the quantity discount is considered. 2. Calculate the economic order quantity which will minimize the company's relevant paper cost.

(d) Without prejudice to your answers for Requirements

(a) and (c), assume that EDP Associates is currently using an economic order quantity of 1,000 cartons and has decided to increase their order quantity to 5,000 cartons to take advantage of the quantity discount offered by Waring Paper. Determine the net increase or decrease this new course of action will have on the annual paper costs of EDP Associates.

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+0+ PC TC = PD + PD+0- TC total inventory-related costs Dannual demand