Success in the ice cream biz comes at cost of responsibility

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Reference no: EM132289432

Success in the ice cream biz comes at the cost of responsibility, which means lots of paperwork. You use about 100 reams of paper a year. A supplier is willing to sell paper at $5 a ream, but beyond 65 reams, the price falls down to $4 a ream, and beyond 100 reams, it further falls down to $3.50 a ream. The cost of setting up an order is only $5 (regardless of quantity). Assume a 5% annual interest rate (you may be doing better than you were in the t-shirt days, but the economy as a whole isn't doing too well anymore).

(a) How many reams should you order at a time assuming an all units discounting scheme is used (under this scheme, the cost of a 70-ream order is $5 + 70 * $4 = $285)? How often should you place an order?

(b) How does your answer change if there is a 7-month lead time (assume you pay on delivery)? What is the non-zero reorder point in this case?

(c) How many reams should you order at a time assuming an incremental discounting scheme is used (under this scheme, the cost of a 70-ream order would be $5+65*$5+(70-65)*$4 = $350)? How often should you place an order?

(d) All other things being equal (prices, holding costs, lead times, quantities at which discounts are offered, etc.), is one type of scheme always favorable to (or at least no worse than) the other for the buyer? If so, which is the favorable scheme for the buyer? If not, give two examples, showing that the buyer strictly prefers a different scheme in each case.

Reference no: EM132289432

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