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fm28 10 - Thus the net effect is that Webster would save...

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Mini Case: 28 - 10 h. Now suppose Webster's supplier offers a discount of 1 percent on orders of 1,000 or more. Should Webster take the discount? Why or why not? Answer: First, note that since the discount will only affect the orders for the operating inventory, the discount decision need not take account of the safety stock. Webster's current total cost of its operating inventory is $20,000 (see part d). If Webster increases its order quantity to 1,000 units, then its total costs for the operating inventory would be $24,800: TIC = CP(Q/2) + F(S/Q) = 0.2($198)(1,000/2) + $1,000(5,000/1,000) = $19,800 + $5,000 = $24,800. Note that we have reduced the unit price by the amount of the discount. Since total costs are $24,800 if Webster orders 1,000 chips at a time, the incremental annual cost of taking the discount is $24,800 - $20,000 = $4,800. However, Webster would save 1 percent on each chip, for a total annual savings of 0.01($200)(5,000) = $10,000.
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Unformatted text preview: Thus, the net effect is that Webster would save $10,000 - $4,800 = $5,200 if it takes the discount, and hence it should do so. i. For many firms, inventory usage is not uniform throughout the year, but, rather, follows some seasonal pattern. Can the EOQ model be used in this situation? If so, how? Answer: The EOQ model can still be used if there are seasonal variations in usage, but it must be applied to shorter periods during which usage is approximately constant. For example, assume that the usage rate is constant, but different, during the summer and winter periods. The EOQ model could be applied separately, using the appropriate annual usage rate, to each period, and during the transitional fall and spring seasons inventories would be either run down or built up with special seasonal orders....
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