You have traditionally ordered an average of 200,000 pounds of per week at a pri

Question

You have traditionally ordered an average of 200,000 pounds of per week at a price of $9 per pound. The inventory is stocked in a rental facility that costs $250,000 per annum. The procurement manager has received an offer from a supplier to deliver a year’s worth at a bulk discount of 10% off the current price. The cost is always paid at delivery, whether you are buying week by week or in bulk. What is the effective annual rate of return if the manager orders in bulk rather than weekly? (You may assume there is no change in storage costs.)

Explanation / Answer

Cost of Placing an Order on Weekly Basis

200,000*$9+$250,000 = $ 2,050,000

Cost of Placing an Order on a Yearly Basis

200,000 * $9*(90/100)+$250,000 = $1,870,000

Savings if orders Yearly=2,050,000-1,870,000 =$1,80,000/$2,050,000

=9%

Assume there is No Time value Money

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