CAF-5 · Chapter 18 · Question 6 of 20
(Inventory Management & Quantity Discounts) The annual demand for a raw material is 30,000 units. The ordering cost is Rs. 800 per order, and the holding cost is Rs. 12 per unit per year. The basic purchase price is Rs. 50 per unit. The supplier offers a 2% discount if the company orders in batches of 5,000 units. What is the net financial impact (savings or extra cost) of accepting the discount offer compared to ordering at the Economic Order Quantity (EOQ)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Net savings of Rs. 19,200
Explanation
EOQ = sqrt(2*30,000*800/12) = 2,000 units. Total cost at EOQ: (30k/2k)*800 + (2k/2)*12 + 30k*50 = 12k + 12k + 1.5m = 1,524,000. Total cost at 5,000 batch: (30k/5k)*800 + (5k/2)*12 + 30k*49 = 4,800 + 30k + 1.47m = 1,504,800. Net savings = 1,524,000 - 1,504,800 = Rs. 19,200.
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