Question

Suppose Stanley's Office Supply purchases 50,000 boxes of pens every year. Ordering costs are $100 per order and carrying costs are $0.40 per box. Moreover, management has determined that the EOQ is 5,000 boxes. The vendor now offers a quantity discount of $0.02 per box if the company buys pens in order sizes of 10,000 boxes. Determine the before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.40 per box whether or not the discount is taken. And a hint: C*P

Answer 1

Answer:

The Before Tax benefit = 500 USD

Explanation:

Data Given:

Purchase = 50,000 boxes

Ordering Cost = 0.40 USD per box

EOQ = 5000 boxes = Economic Order Quantity

Vendor Offer = 0.02 USD per Box for the order size of 10,000 boxes.

Our EOQ is 5000:

So, first find costs associated without the offer.

Ordering Cost = (50000/5000) x 100 = 1000 USD

Carrying Cost = (5000/2) x 0.4 = 1000 USD

Total cost before accepting the offer = 1000 + 1000 = 2000 USD

Now, let's find the costs associated with offer accepted.

Ordering Cost = (50000/10000) x 100 = 500 USD

Carrying Cost = (10000/2) x 0.4 = 2000 USD

Total Cost = 2500 USD

Cost Saved from Discount = 50000 x 0.02 = 1000 USD

So, Total after accepting the offer = 2500 USD - 1000 USD

Total after accepting the offer = 1500 USD

So, the Before Tax benefit = 500 USD