Inventory

control Models
Quantity Discount Models
• Quantity discounts are commonly available
• Basic EOQ model is adjusted by adding in the
purchase or materials cost
Total cost = Material cost + Ordering cost + Holding cost

D Q
Total cost = DC + Co + Ch
Q 2
where
D = annual demand in units
Co = ordering cost of each order
C = cost per unit
Ch = holding or carrying cost per unit per year

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Quantity Discount
Holding cost per Models
unit is based on cost, so
• Quantity discounts are commonly availableCh = IC
• Basic EOQ model is adjusted by adding in the
where
purchase or materials cost
I = holding cost as a percentage of the unit cost (C)

Total cost = Material cost + Ordering cost + Holding cost

D Q
Total cost = DC + Co + Ch
Q 2
where
D = annual demand in units
Co = ordering cost of each order
C = cost per unit
Ch = holding or carrying cost per unit per year

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 Brass Department Store
Brass Department Store stocks toy race cars. Recently, the
store was given a quantity discount schedule for the cars;
this quantity discount schedule is shown in the following
table. Thus, the normal cost for the toy race cars is $5.
For orders between 1,000 and 1,999 units, the unit cost is
$4.80, and for orders of 2,000 or more units, the unit cost
is $4.75. Furthermore, the ordering cost is $49 per order,
the annual demand is 5,000 race cars, and the inventory
carrying charge as a percentage of cost, I, is 20% or 0.2.

What order quantity will minimize the total inventory

cost?

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Quantity Discount Models
• Discount schedule and EOQs might not align
• Buying at the lowest unit cost may not result in
lowest total cost
Quantity Discount Schedule

DISCOUNT DISCOUNT DISCOUNT

NUMBER QUANTITY DISCOUNT (%) COST ($)
1 0 to 999 0 5.00
2 1,000 to 1,999 4 4.80
3 2,000 and over 5 4.75

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Quantity Discount Models
Total Cost Curve for the Quantity Discount Model

Total
TC Curve for Discount 3
Cost $
TC Curve for
Discount 1

TC Curve for Discount 2

EOQ for Discount 2

0 1,000 2,000
Order Quantity
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Quantity Discount Models
• Steps in the process

1. For each discount price (C), compute 2DCo

EOQ =
IC

2. If EOQ < Minimum for discount, adjust the quantity to

Q = Minimum for discount

3. For each EOQ or adjusted Q, compute D Q

Total cost = DC + Co + Ch
Q 2

4. Choose the lowest-cost quantity

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Brass Department Store
• Toy race cars
• Quantity discounts available
Step 1 – Compute EOQs for each discount

(2)(5,000)(49)
EOQ1 = = 700 cars per order
(0.2)(5.00)
(2)(5,000)(49)
EOQ2 = = 714 cars per order
(0.2)(4.80)
(2)(5,000)(49)
EOQ3 = = 718 cars per order
(0.2)(4.75)

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Brass Department Store
Step 2 – Adjust quantities below the allowable discount
range
– The EOQ for discount 1 is allowable
– The EOQs for discounts 2 and 3 are outside
the allowable range, adjust to the possible
quantity closest to the EOQ

Q1 = 700
Q2 = 1,000
Q3 = 2,000

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Brass Department Store
Step 3 – Compute total cost for each quantity
Total Cost Computations for Brass Department Store

ANNUAL ANNUAL ANNUAL

UNIT ORDER MATERIAL ORDERING CARRYING
DISCOUNT PRICE QUANTITY COST ($) COST ($) COST ($)
NUMBER (C) (Q) = DC = (D/Q)Co = (Q/2)Ch TOTAL ($)

1 $5.00 700 25,000 350.00 350.00 25,700.00

2 4.80 1,000 24,000 245.00 480.00 24,725.00

3 4.75 2,000 23,750 122.50 950.00 24,822.50

Step 4 – Choose the alternative with the

lowest total cost

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