The case of a fixed discount-discount structures, Managerial Accounting

Assignment Help:

The case of a fixed discount

When evaluating inventory decisions when a fixed discount rate exists, the appropriate procedure is to compare the total costs of the EOQ with the total costs when discounts are taken. The option giving lower costs is then chosen.

Note: The Unit (variable) cost (i.e. Purchase Price) behaves in the following manner.

C = Co        if    0 ≤ Q ≤ Qb
Co (1 - P)    if    Q ≥ Qb


Where:

Co = basic unit cost without a discount
P = Discount rate allowed.
Qb = Break-point (Quantity) - where discounts become operational.

In order to determine the optimal ordering quantity, it is necessary to include the costs of the inventory with the carrying ordering costs.

Total costs of Inventory = Total Purchase cost + Total order cost + Total carrying cost

TC = DCo + (Q*/2) H + Do/Q2                  If 0 ≤ Q ≤ Qb   
TC = DC. (1 - P) + (Q/2) H + Do/Q            If Q ≥ Qb   

                               
Note:

The second equation i.e. with discounts will give a lower TC than first equation for the same. The decision whether to go for the discount lies on a trade-off between extra carrying costs vs. a decrease in acquisition costs.


Related Discussions:- The case of a fixed discount-discount structures

Advise c''man on the form of business entity he should select, Coleman, a m...

Coleman, a married taxpayer, is going to establish a manufacturing business. He anticipates that the business will be profitable immediately due to a patent he holds. He predicts t

Inventory planning & control under uncertainty, Inventory planning & contro...

Inventory planning & control under uncertainty The basic EOQ model assumes that all the parameters (elements) in the model are certain (i.e. can be predicted precisely in advan

Analysis of each decision package , Analysis of Each Decision Package ...

Analysis of Each Decision Package This analytic procedure permits the manager of the decision package and its alternatives to assess and validate its operation. Numerous quest

The games economists play, THE GAMES ECONOMISTS PLAY It sounds like a s...

THE GAMES ECONOMISTS PLAY It sounds like a sports fan's dream.  In Stockholm on October 11th, three men share a $1m prize for their skill at analyzing games. They are not telev

International management challenges of globalization., what is the topic ab...

what is the topic about? what are the practical implications? what are the practical criticisms?

State the capital gearing ratio, Capital gearing ratio  The term capit...

Capital gearing ratio  The term capital gearing is used to describe the relation ship between equity share capital including reserves and surplus to preference share capital a

Types of non-controlled variables, Types of Non-Controlled Variables a) ...

Types of Non-Controlled Variables a) Parameters: These are input variables that for a given simulation have a constant value. They are factors which help specify the relat

Advantages and limitations of game theory, Advantages and limitations of ga...

Advantages and limitations of game theory Advantage: Game theory helps us to learn how to approach and understand a conflict situation and to improve the decision maki

Introduction to performance evaluation, Introduction to Performance Evaluat...

Introduction to Performance Evaluation Performance evaluation deals with the area of MA that is concerned with: 1) Holding individual managers responsible for certain aspect

Identify which of the entities listed should record, Frontier Sports sells ...

Frontier Sports sells hunting and fishing equipment and provides guided hunting and fishing trips. Frontier Sports is owned and operated by Wally Schnee, a well-known sports enthus

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