Quality discount and order quantity, Financial Accounting

Assignment Help:

The standard EOQ analysis is depends on the assumption which the price per unit keeps constant irrespective of the size of the order. While quantity discounts are obtainable, that is often the case; the price per unit is affected through the order quantity. That violates the applicability of the EOQ formula. Although, the EOQ framework can still be employed as a starting point for analyzing the problem. To find out the optimal order size while quantity discounts are available the subsequent procedure may be used:

1) Find out the order quantity using the standard EOQ formula by assuming no quantity discount, name as Q*.

2) If Q* facilitates the firm to find quantity discount so it represents the optimal order size.

3) If Q* is less than the minimum order size needed for quantity discount (name as Q′) compute the change in profit as a effect of increasing the order quantity from Q* to Q' given as:

2046_Quality Discount and Order Quantity.png

Here 

Δπ  = change in profit.

 U    =   annual usages/demand

D    =   discount per unit when quantity discount is available

Q*  =   economic order quantity assuming no quantity discount

Q′  =   minimum order size required for quantity discount

F    =   fixed cost of placing an order

P    =   unit purchase price without discount

C    =   inventory carrying cost expressed as a percentage.

Well at the right-hand side of the equation, the initial term presents savings in price, the next term shows savings in ordering cost and the third term shows the raise in carrying cost.

4) If the change in profit is positive, Q′ shows the optimal order quantity. Whether the change in profit is negative, Q* shows the optimal order quantity.

To demonstrate the above process, see the subsequent data pertaining to Quantum Ltd.

U = annual usage=10,000 units

F  =  foxed cost per order =Rs. 150

P  = purchase price per unit =Rs. 20

C = carrying cost=25% of inventory value

Q′ = minimum order size required for quantity discount=1,000 units

D = discount per unit =Re.1.

The EOQ by assuming no quantity discount:

1197_Quality Discount and Order Quantity1.png

= 75 units

As Q* is less than Q′ (1,000), the change in profit as a effect of raising the order quantity from Q* to Q′ is as:

915_Quality Discount and Order Quantity2.png

= 10,000 ×1 + [ (10,000/775) - (10,000/1,000) ] 150 - [((1,000(20 -1) 0.25)/2) - ((775 ×20 ×0.25)/2)]

= 10,000 + 435 - (2,375 - 1,938)

= Rs. 9,998.

As the change in profit is positive, Q′=1,000 shows the optimal order quantity. This must be noted that the above procedure is depends on the principle of marginal analysis.  This involves comparing incremental benefits along with incremental costs in moving from one level of inventory to the other.  This principle may be used to as a given order quantity along with the present order quantity and more generally for comparing any set of alternatives.


Related Discussions:- Quality discount and order quantity

Determine npv and expected market return, Using CAPM's formula, Return o...

Using CAPM's formula, Return on equity = Risk-free rate + Beta*(Expected market return - risk-free rate) With the given information, Return on equity = 1% + 0.55*(8% - 1%)

What do you eman by lease, Q. What do you eman by Lease? Lease - Convey...

Q. What do you eman by Lease? Lease - Conveyance of buildings orland, equipment or other ASSETS from one person (LESSOR) to another (LESSEE) for a specific period of time for m

Coupon interest rate , Simon Corporation's bonds have 12 years left over to...

Simon Corporation's bonds have 12 years left over to maturity. Interest is paid yearly, the bonds have a $1,000 par value, and the coupon interest rate is 11.5%. The bonds have a y

Calculate the npv and arr, Calculate the NPV and ARR The manager of XY...

Calculate the NPV and ARR The manager of XYZ Ltd has identified a market for a new product that she estimates can be sold for $12 per unit. Research indicates that the busines

Cash budget, Beginning balance 24,000 cash Sales 250,000 Gross profit 45% o...

Beginning balance 24,000 cash Sales 250,000 Gross profit 45% of sales Accounts receivable increase by 24,000 Accounts payable increased by 51,000 Inventory increased by 98,000 Sell

Calculate the sales needed to earn a profit of 20% on sales, Question: ...

Question: The following data are obtained from the record of a factory:                                                        £                   £ Sales 4,000 units @ £2

Journalize the foregoing transactions and post to the a/c, During the fourt...

During the fourth quarter of 2006, Cablevision, Inc., generated excess cash, which the company invested in securities, as follows: On Nov. 12 purchased 1,000 shares of common st

Secured creditors-bankruptcy and liquidation, SECURED CREDITORS A secur...

SECURED CREDITORS A secured creditor may: Rely on his security and not prove at all. Surrender his security and prove for the full amount of the debt. Realise his s

Define strong form efficiency, Q. Define Strong form efficiency? In rob...

Q. Define Strong form efficiency? In robustly efficient market finance directors will be alert to the fact that market prices are an accurate reflection of their company's fina

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd