Suppose Stanley's Office Supply purchases 50,000 boxes of pens 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 pens 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

Without the quantity discount:
Total ordering cost = (50,000/5,000) x $100 = $1,000
Total carrying cost = 50,000 x $0.40 = $20,000
Total cost = $21,000

With the quantity discount:
Total ordering cost = (50,000/10,000) x $100 = $500
Total carrying cost = 50,000 x $0.40 = $20,000
Total cost = $20,500 ($0.20 discount x 10,000 boxes = $2,000 savings)

The before-tax benefit of accepting the quantity discount would be $500 ($21,000 - $20,500).

Suppose Stanley's Office Supply Purchases 50,000 Boxes of Pens Every