Suppose the Campus Bookstore purchases 50,000 boxes of writing tablets every year. Ordering costs are $100 per order and carrying costs are
$0)40 per box. Moreover, management has determined that the EOQ is 5,000 boxes. The vendor now offers a quantity discount of $0.20 per box if the company buys tablets in order sizes of 10,000 boxes. Determine the before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)
A) $1,000 loss
B) $1,000 benefit
C) $ 500 loss
D) $ 500 benefit
E) $ 0 (The change would not affect profits.)

Question

Quizplus · Accepted Answer

The quantity discount of $0.20 per box on orders of 10,000 boxes would result in a savings of $0.20 x 10,000 = $2,000 per order. Since the EOQ is 5,000 boxes, the company would need to place 10 orders per year to meet its demand. Therefore, the total savings from the quantity discount would be $2,000 x 10 = $20,000.The ordering cost for 10 orders would be $100 x 10 = $1,000. The carrying cost for 10 orders would be $0.40 x 5,000 x 10 = $20,000.Therefore, the before-tax benefit of accepting the quantity discount would be $20,000 - $1,000 - $20,000 = $500.

Suppose the Campus Bookstore Purchases 50,000 Boxes of Writing Tablets