Meena Distributors has an annual demand for an airport metal detector of 1 comma 360 units. The cost of a typical detector to Meena is $400. Carrying cost is estimated to be 18% of the unit cost, and the ordering cost is $23 per order. If Purushottama Meena, the owner, orders in quantities of 300 or more, he can get a 9% discount on the cost of the detectors. Should Meena take the quantity discount? What is the EOQ without the discount?

1. Meena should take the quantity discount since with such discount the EOQ will rise by just 1 unit from 20.5units to 21.5 units and a net gain of $49.18.

2. The EOQ without discount will be 20.5 units

Explanation:

EOQ=Square root of ((2xordering cost x demand)/ (Carrying cost))

Gains of accepting discount will be

i. ordering cost savings= (demand/quantity order) x ordering cost

= (660/360)*23=$42.16

ii. Price saving per item=0.18 x 660 =$118.80

total gain =$160.96

iii. Stockholding cost =300 x (23 x 0.91 ) x 0.18=$1,130.22

iv. Additional cost incurred by increasing order= 1,130.22-(300 x 23 x0.18)

=$111.78

Net gain= 160.96-111.78

= $49.18