EOQ WITH QUANTITY

DISCOUNTS
Objectives

To understand what quantity discounts are

To determine the optimal order quantity when
quantity discounts are present.
When carrying costs are constant
When carrying costs vary according to the
purchase price

Quantity discounts are price reductions for large
orders offered to customers to induce them to buy in
large quantities.
Potential benefits
a. reduced purchase price
b. fewer orders ordering cost decreases

Potential drawbacks
a. Increase in carrying costs due to higher
inventories

Minimize total cost, where the total cost is the sum
of carrying cost, ordering cost, and purchasing.
Total Cost,
K = Carrying Cost + Ordering Cost +

Purchasing Cost


= (Q/2)Cc + (D/Q)Co + Cp
Two general cases of the model

Carrying costs are constant (e.g. 2 $/unit)



Carrying costs are stated as a percentage of
purchase price ( e/g 20 % of unit price)
Carrying costs are constant
All curves have the same EOQ
c b, a, C *
2
c
Q
Co
Q
D
Ka
Kb
Kc
Quantity
C
o
s
t
Procedure for calculating EOQ
Compute the common EOQ.
Only one of the unit prices will have the EOQ
in its feasible range since the range do not
overlap/ Identify that range.
If the feasible EOQ is on the lowest price range,
that is the optimal order quantity.
If the EOQ is in any other range, compute the
total cost for the EOQ and for the price breaks of
all lower unit costs. Compare the total cost. The
quntity when the total cost is minimum is the
optimal order quantity.
Example
The maintenance department of
a large hospital uses about 816
cases of liquid cleanser
annually. Ordering cost is 12$,
carrying costs are 4$/cases, and
the price schedule is as follows:



Determine the optimal order
quantity and the total cost.
Range Price
1 to 49 $20
50 to 79 $18
80 to 99 17
100 16
Compute the common EOQ

Qo =

=

= 70 cases

The 70 cases can be bought at 18 $/case,
since 70 falls in the range of 50-79 cases.
(2DCo)/Cc
)}/4 {2(816)(12
The total cost to purchase 816 cases/ a year at
a rate of 70 cases/order, will be:

TC 70 = (D/Q) Co + (Q/2)Cc + Cp

= (816/70)12 + (70/12)4 + 81618

= 14 968 $
Since the cost ranges exist, each must be
checked against the minimum cost generated
by 70 cases at 18 $ each. In order to buy at
17$/case, at least 80 cases must be
purchased. The total cost at 80 cases will be

TC 80 = (816/80)12 + (80/2)4 + 81617

= 14 154 $

TC100 = (816/100)12 + (100/2)4 + 81616

= 13 354 $

Since 100 cases per order yields the lowest
total cost, 100 cases is the overall optimal
order quantity
Carrying costs are stated as a
percentage of purchase price
each curve will have a different EOQ
EOQ
a
EOQ
b
EOQ
c
Ka
Kb
Kc
CCa
CCb
carrying cost
Procedure for calculating EOQ
Beginning with the lowest price, compute
the EOQ for each price range until a
feasible EOQ is found (i.e. until an EOQ is
found that falls in the quantity range
for its price)
If the EOQ for the lowest price is feasible, it
is the optimal order quantity. If the
EOQ is not the lowest price range, compare
the total cost at the price break for all lower
prices with the total cost of the largest
feasible EOQ. The quantity that yields the
lowest total cost is the optimum quantity.
Example
Surge Electric uses 4000
toggle switches a year.
Switches are priced as
follows:


Range Unit Price
1-499 0.90 $
500-999 0.85
1000+ 0.82
It costs approximately 18 $ to prepare an
order and receive it, and carrying costs are
18% of the purchase price per unit on an
annual basis. Determine the optimal order
quantity and the annual cost.

Find the EOQ for each price, starting with the
lowest price, until a feasible EOQ is located


Cc = 0.18(0.82)=0.1476

EOQ (0.82) =

=

= 988 switches
(2DCo)/Cc
6 18)}/0.147 {2(4000
Since 988 switches will cost 0.85 $ each
rather than 0.82 each, 988 is not feasible
EOQ. Next try 0.85 per unit.

Cc = 0.18(0.85)=0.1530

EOQ (0.85) =

= 970 switches

This is feasible; 970 falls in the 0.85 $ ranges
of 500-999.
153 . 0 / )} 18 4000 ( 2 {
TC 970 = (4000/970) 18 + (970/2) 0.153 +
0.85(4000)
= 3 548 $

TC 1000 = (4000/1000) 18 + (1000/2)
0.1476 + 0.82(4000)
= 3 426 $

Thus the minimum-cost order size is 1000
switches.