BB manufactures a range of electronic products. The supplier of component Y has informed BB that it
Question:
BB manufactures a range of electronic products. The supplier of component Y has informed BB that it will offer a quantity discount of 1.0 percent if BB places an order of 10 000 components or more at any one time.
Details of component Y are as follows:
Cost per component before discount .......................$2.00
Annual purchases ....................................................150 000 components
Ordering costs ...............................................................$360 per order
Holding costs ................................................................$3.00 per component per annum
Required:
(i) Calculate the total annual cost of holding and ordering inventory of component Y using the economic order quantity and ignoring the quantity discount.
(ii) Calculate whether there is a financial benefit to BB from increasing the order size to 10 000 components in order to quality for the 1.0 percent quantity discount.
Economic order quantity (EOQ) is the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs. This production-scheduling model was developed in 1913 by Ford W. Harris and has...
Step by Step Answer:
i The economic order quantity EO Q can be calculated using the following formula ...View the full answer
