ACCA MA · Chapter 4 · Question 9 of 11
Annual demand for a material is 36,000 units, with a purchase price of $10 per unit. Ordering costs are $40 per order, and holding costs are $2 per unit per year. The EOQ is 1,200 units. The supplier offers a 2% discount on all units if each order is for at least 3,000 units. What would the total annual cost (purchases, ordering and holding) be if the company ordered 3,000 units each time?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $356,280
Explanation
Purchases = 36,000 x $10 x 0.98 = $352,800. Ordering = (36,000 / 3,000) x 40 = 12 x 40 = $480. Holding = (3,000 / 2) x 2 = $3,000, based on average inventory. Total = 352,800 + 480 + 3,000 = $356,280. This is less than the $362,400 cost at the EOQ (360,000 + 1,200 + 1,200), so the discount is worth accepting.
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