MODEL

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 QUANTITY DISCOUNT

From this presentation we will show you on how to

buy the lowest total cost quantity, which will save the
buyer money and, in some cases, receive more goods.

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Quantity Discount Model
• When material is purchased, suppliers often give a
discount on orders over a certain size.
• This can be done because larger orders reduce the
supplier’s costs; to get larger orders, they are
willing to offer volume discounts.
• The buyer must decide whether to accept the
discount, and in doing so, must consider the
relevant costs :
- Purchase cost.
- Ordering cost.
- Carrying cost.
Quantity Discount Model
• Same as the EOQ model, except:
– Unit price depends upon the quantity ordered.

• The total cost equation becomes:

TCQD
D  Q 
  S    H 
Q   2 
 PD
P : Price/Cost per unit
D : Annual Demand
 Quantity Discount Models
A typical quantity discount schedule

Table 1
Discount Discount
Number Discount Quantity Discount (%) Price (P)
1 0 to 999 no discount $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
Steps in analyzing a quantity discount
1. For each discount, calculate Q*
2. If Q* for a discount doesn’t qualify, choose
the smallest possible order size to get the
discount
3. Compute the total cost for each Q* or
adjusted value from Step 2
4. Select the Q* that gives the lowest total
cost
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 Quantity Discount Example
Calculate Q* for every discount 2DS
Q* =
IP
2(5,000)(49)
Q1* = = 700 cars order
(.2)(5.00)

2(5,000)(49)
Q2* = = 714 cars order
(.2)(4.80)

2(5,000)(49)
Q3* = = 718 cars order
(.2)(4.75)
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 Quantity Discount Example
Calculate Q* for every discount 2DS
Q* =
IP
2(5,000)(49)
Q1* = = 700 cars order
(.2)(5.00)

2(5,000)(49)
Q2* = = 714 cars order
(.2)(4.80) 1,000 — adjusted
2(5,000)(49)
Q3* = = 718 cars order
(.2)(4.75) 2,000 — adjusted
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 Quantity Discount Example
Table 2
Annual Annual Annual
Discount Unit Order Product Ordering Holding
Number Price Quantity Cost Cost Cost Total
1 $5.00 700 $25,000 $350 $350 $25,700

2 $4.80 1,000 $24,000 $245 $480 $24,725

3 $4.75 2,000 $23.750 $122.50 $950 $24,822.50

Choose the price and quantity that gives the lowest total cost
Buy 1,000 units at $4.80 per unit

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Let us clarify it with example:
The annual usage of product X in a manufacturing company is
2600 units. Other information related to inventory is shown in
Table 3. Determine the quantity and price that gives the lowest
total inventory cost.
(10 marks)
Table 3

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Solution:

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