Lecture on Chapter 4: Economic Order Quantity (EOQ) and Quantity Discounts

Overview

This lecture continues from the previous one on Chapter 4 of the free lecture notes from Open Tuition.
Focuses on Economic Order Quantity (EOQ) and explores the concept of quantity discounts.

EOQ Previously Calculated: In the last lecture, the EOQ was determined to be 800 units, minimizing total inventory costs to $2,000.
Inventory Costs Ignored: Purchase cost for 40,000 units was ignored, assuming a cost of $25 per unit.

Suppliers Offer Discounts: Discounts depend on the number of units ordered.
- 0 to <5,000 units: No discount.
- 5,000 to <10,000 units: 1% discount on purchase price.
- 10,000 or more units: 1.5% discount on purchase price.

800 units (EOQ)
- Inventory Costs: Total $2,000.
- Purchase Cost: With no discount, total cost is $1,000,000.
- Total Cost: $1,002,000.
5,000 units
- Inventory Costs: Higher, totaling $6,348.
- Purchase Cost: Reduced to $990,000 with a 1% discount.
- Total Cost: $996,348, cheaper than 800 units.
10,000 units
- Inventory Costs: Increase significantly to $12,393.
- Purchase Cost: Further reduced to $985,000 with a 1.5% discount.
- Total Cost: $997,393, higher than 5,000 units.

Best choice for cost minimization: Order 5,000 units.
Analysis shows that despite higher inventory costs, the discount at 5,000 units makes it the most cost-effective.

Buffer/Safety Inventory: Refers to extra units held to prevent stockouts if there's a delay in the new order delivery.
- Does not affect the EOQ but impacts holding costs.
- Example: Holding an extra 100 units throughout the year.

Importance of Costing Out Options: For different order quantities, there is no shortcut. Each alternative must be costed out to determine the best option.

This lecture ends the discussion on EOQ with quantity discounts. The next lecture will address the Just-in-Time system.