There are occasions when a firm is able to take advantage of quantity discounts provided the order size reaches a certain level.It is possible to analyze and decide on such cases.
For instance, in the preceding example, we found that the usage per year is 2000 units, the holding cost per unit per year is N10 and the ordering cost is N100. Let us now consider what would be the solution if it was known that a quantity discount of 10% in price is available if the order size is raised to 250 units.
Whether or not the quantity discount should be availed of depend on an assessment of the cost and benefits involved. The saving resulting from the quantity discount = N1 x 0.10 x 2000 = N2000.The cost is the additional holding cost minus savings in ordering cost stemming from fewer orders being placed.
While the cost was CO*⁄2 = 10 (200)⁄2 = N1000.
The cost would now be Cq⁄2 = 10 (250)⁄2 = N1250.
Where q* = new order size
There would be a difference of N250.
The savings in ordering cost can be arrived at as follows:
Total ordering cost when 200 units are ordered each time
= 2000 (100)⁄200 = N100
Total ordering cost when 250 units are ordered each time
= 2000 (100⁄250) = N800
Therefore, the saving in ordering cost would be N200 i.e. (N1000 – 800).
Thus, while the saving in ordering cost would be N200, the escalation in holding cost would be N250, that is to say that the net increase in cost would be N50.
In this particular instance, it would be advisable to avail of the quantity discount option because the saving of N200 exceeds the net increase in cost of N50.
Working Capital Management Related Interview Questions
|Financial Accounting Interview Questions||Auditing Interview Questions|
|Management Accounting Interview Questions||Capital Market Interview Questions|
|Budget and Planning Interview Questions||Budgetary Control Interview Questions|
|Capital structure Interview Questions||Capitalization Interview Questions|
|Balance sheet Interview Questions||Accounting Principles Interview Questions|
|Corporate Finance Interview Questions||Capital Gains Tax Interview Questions|
|Apparel Merchandising Interview Questions||Discounted Cash Flow (DCF) Interview Questions|
|Venture Capital Interview Questions||Cash Flow Management Interview Questions|
Working Capital Management Related Practice Tests
|Financial Accounting Practice Tests||Auditing Practice Tests|
|Management Accounting Practice Tests||Capital Market Practice Tests|
|Budget and Planning Practice Tests||Budgetary Control Practice Tests|
|Balance sheet Practice Tests||Accounting Principles Practice Tests|
Working Capital Management Tutorial
Working Capital Management Theories
Working Capital Management Approaches
Ratio Analysis I
Ratio Analysis Ii
Fund Flow Analysis
Cash Flow Analysis
Cash Flow Forecasting I
Cash Flow Forecasting Ii
Cash Flow Budgeting
Bank Credit: The Framework I
Bank Credit: The Framework Ii
Bank Credit Assessment
Bank Credit Appraisal
Non-bank Finance I
Non-bank Finance Ii
Receivable Management I
Receivable Management Ii
Cash Management I
Inventory Management I
Inventory Management Ii
All rights reserved © 2018 Wisdom IT Services India Pvt. Ltd
Wisdomjobs.com is one of the best job search sites in India.