ACCA FM · Chapter 4 · Question 3 of 12
A company buys 20,000 units a year at $10 each. Ordering costs are $200 per order and holding costs are $1.50 per unit per year (unaffected by the purchase price). The supplier offers a 2% discount on all units if each order is for at least 5,000 units. Compared with ordering the EOQ, what is the net annual saving from ordering 5,000 units at a time (to the nearest $)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) $2,914
Explanation
EOQ = square root of (2 x 200 x 20,000 / 1.50) = 2,309.4 units. Ordering and holding costs at the EOQ = (20,000/2,309.4 x 200) + (2,309.4/2 x 1.50) = $3,464. At 5,000 units: (20,000/5,000 x 200) + (5,000/2 x 1.50) = $4,550, an increase of $1,086. Discount saved = 20,000 x $10 x 2% = $4,000. Net saving = $4,000 - $1,086 = $2,914 (to the nearest $).
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