4. Each year, Holly's Best Salad Dressing, Inc. (HBSD) purchases 50,000 gallons of extra virgin olive oil. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to HBSD is $0.50 per gallon. Management currently orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time. Should HBSD take the discount?

Question

Business

Tristian Ellis

19 July, 19:08

4. Each year, Holly's Best Salad Dressing, Inc. (HBSD) purchases 50,000 gallons of extra virgin olive oil. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to HBSD is $0.50 per gallon. Management currently orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time. Should HBSD take the discount?

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Answers (1)

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Benjamin · Answer 1

HBSD should take the discount because it will

lead to as savings of $1,120.00

Explanation:

step 1

Determine the the inventory cost of EOQ

EOQ = √ (2 * Co * D) / Ch

= √ (2 * 100 * 50,000) / 80% * $0.50

= 5,000 units

Inventory cost = Purchase cost + Ordering cost + carrying cost

$

Purchase cost = 50,000 * $0.50 = 25,000.00

Ordering cost = (50,000/5000) * 100 = 1,000

carrying cost = (5000/2) * $0.50 * 80% = 1,000

Total cost 27,000.

Step 2

Determine the inventory cost for order of 10,000 gallons

Order of 10,000 gallons

Purchase cost = $ (0.50-0.03) * 50,000 = 23,500.

Ordering cost = (50,000/10,000) * 100 = 500

Carrying cost = (10000/2) * $ (0.50-0.03) * 80% = 1880

Total cost 25,880.

Step 3

Compare the cost under the two options

HBSD should take the discount because it will

lead to as savings of $1,120.00 i. e (927,000 - 25,880.)