Whole Nature Foods sells a gluten-free product for which the annual demand is 5000 boxes. At the moment it is paying $6.40 for each box; carrying cost is 25% of the unit cost; ordering costs are $25. A new supplier has offered to sell the same item for $6.00 if Whole Nature Foods buys at least 3000 boxes per order. Determine the total costs under both scenarios. Should Whole Nature Foods stick with the old supplier, or take advantage of the new quantity discount.

the answer is = 32291.67.

The firm should take the advantage of the new quantity as the total cost is lesser as compared with the old supplier. the firm can save $340 by approximately taking the advantage of the new quantity discount.

Explanation:

Solution

Given that:

The Annual demand D = 5000 boxes

The Cost C = $6.4 per each box

The Carrying cost H = 25% of the unit cost = 0.25*6.4 = 1.6

The ordering costs S = $25.00

Now,

EOQ = √2DS/H

EOQ = √ (2*5000 * 25) / 1.6

Thus,

EOQ = Q = 395.28

The Total cost = DC + (Q/2) H + (D/Q) S

= 5000*6.4 + (395.28 / 2) 1.6 + (5000/395.28) 25

Then,

T = 32000 + 316.23 + 316.23

= 32632.46

So,

The new supplier has offered to sell the same item for the amount of $6.00 if Q = 3,000 boxes

Hence,

The total cost = 5000 * 6 + (3000/2) 1.5 + (5000/3000) 25

= 30000 + 2250 + 41.67

= 32291.67

Therefore, The firm should take the advantage of the new quantity as the total cost is lesser as compared with the old supplier. the firm can save $340 by approximately taking the advantage of the new quantity discount.