Joe Manufacturing uses 2,400 units of a product per year on a continuo

Joe Manufacturing uses 2,400 units of a product per year on a continuous basis. The product carrying costs are $60 per year and ordering costs are $250 per order.

It takes 20 days to receive a shipment after an order is placed and the firm requires a safety stock of 8 days of usage in inventory.
(a) Calculate the economic order quantity (round up to the nearest whole unit.)
(b) Calculate the total cost per year to order and carry this item.
(c) Its supplier has notified Joe that if Joe increases its order quantity by 58 units they will give it a discount. Calculate the dollar discount that the suppliers will have to give Joe Manufacturing to result in a net benefit to the company.

ANSWER

(a) EOQ = = 142 units
(b) Total cost = (2,400 / 142 ) × ($250 ) + (142 /2 ) × ($60 ) = $8,485
(c) Total cost at new level = (2,400 / 200 ) × ($250 ) + (200 / 2 ) × ($60 ) = $9,000
The yearly discount will have to be at least $515 ($9,000 – $8,485 ) to make the decision neutral; over $515 to result in a net benefit to the company.