A-Mart Stores sells small-screen television sets in its many retail outlets Typi
ID: 335420 • Letter: A
Question
A-Mart Stores sells small-screen television sets in its many retail outlets Typical total sales for all stores are projected to be 120,000 units. The vendor in South Korea normally sells the sets for $100U.S. However, the vendor will offer a $5 discount if a buyer will place a special order of at least 20,000 units. The buyer's carrying costs are 30% per year, and the cost to prepare purchase orders is $40 per order. Transportation costs are included in the price. If there were no such a discount, the economic order quantity would have been 566 units Should the buyer accept the discount? If so, what should the special purchase order size be? a. No, don't accept the discount. Keep ordering the above EoQ units b. Yes, accept the discount, and special prder size should be 566 units c. Yes, accept the discount, and special order size should be 1132 units d. Yes, accept the discount, and special order size should be 20000 units e. Yes, accept the discount, and special order size should be 21648 unitsExplanation / Answer
Total cost calculation for order quantity = 566 :
Annual ordering cost
= Ordering cost x number of orders
= Ordering cost x Annual demand/ Order quantity
= $40 x 120,000/566
= $ 8480.56
Annual unit inventory holding cost = Ch = 30% of $100 = $30
Annual inventory holding cost = Ch x Average inventory = Ch x Order quantity/ 2 = $30 x 566/ 2 = $8490
Annual purchase cost = $100/ unit x 120,000 units = $12000000
Total annual cost
= Annual ordering cost + annual inventory holding cost + annual purchase cost
= $8480.56 + $8490 + $12000000
= $12016970.56
Total cost calculation for order quantity = 20,000 :
Revised price ( after 5 % discount ) = 95% of $100 = $95
Annual ordering cost
= Ordering cost x number of orders
= Ordering cost x Annual demand/ Order quantity
= $40 x 120,000/20,000
= $ 40 x 6
= $240
Annual unit inventory holding cost = Ch = 30% of $95 = $28.50
Annual inventory holding cost = Ch x Average inventory = Ch x Order quantity/ 2 = $28.50 x 20,000/2 = $285000
Annual purchase cost = $95/ unit x 120,000 units = $ 11400000
Total annual cost
= Annual ordering cost + annual inventory holding cost + annual purchase cost
= $28.50 + $285000 + $11400000
= $11685028.50
Since total cost for order quantity of 20,000 < Total cost for order quantity of 566 . buyer should accept the discount
ANSWER : YES, ACCEPT THE DISCOUNT AND SPECIAL ORDER SIZE WILL BE 20,000
ANSWER : YES, ACCEPT THE DISCOUNT AND SPECIAL ORDER SIZE WILL BE 20,000
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