Each year, Holly's Best Salad Dressing, Inc. (HBSD) purchases 50,000 gallons of extra virgin olive oil. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to HBSD is $0.50 per gallon. Management currently orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time. Should HBSD take the discount?
A) from a cost standpoint, hbsd is indifferent.
B) no, the cost exceeds the benefit by $500.
C) no, the cost exceeds the benefit by $1,000.
D) yes, the benefit exceeds the cost by $500.
E) yes, the benefit exceeds the cost by $1,120.

Question

Quizplus · Accepted Answer

$\begin{aligned}
T C & = ( 50,000 / 5,000 ) ( \$ 100 ) + ( 10,000 / 2 ) ( \$ 0.50 ) ( 0.80 ) \
& = \$ 1,000 + \$ 1,000 = \$ 2,000
\end{aligned}$ 
If the firm orders 10,000 gallons at a time,
 $\begin{aligned}
T C & = ( 50,000 / 10,000 ) ( \$ 100 ) + ( 10,000 / 2 ) ( \$ 0.47 ) ( 0.80 ) \
& = \$ 500 + \$ 1,880 = \$ 2,380
\end{aligned}$ 
Therefore, costs increase by $2,380 σ $2,000 = $380. The benefit is ($0.03)(50,000) = $1,500. Thus, the benefit exceeds the cost by $1,120.

Each Year, Holly's Best Salad Dressing, Inc