Quantity Discount Model

Quantity Discount Model

A quantity discount is a reduced price for an item when it is purchase
large quantity. Example, quantity discount table for television set:
Discount Discount Discount price
Number Quantity
1 0-99 $100(no discount)
2 100-199 $80 (d1)
3 >200 $60(d2)

How does the operations manager make decision as an opportunity

to save money on quantity discounts.

The overall objective is to minimize total inventory cost. The large

discount offer may not be the minimize the total inventory costs.
In quantity discount the trade-off is between reduced price product
cost and increased holding cost.
The basic EOQ model for determine the optimal order size with
quantity discount:

Total cost= Product cost + Setup cost + Holding cost

TC = PD + (DS)/Q + (Q/2) H

Where
Q= quantity order
D=Annual Demand in units
S=ordering or setup cost per order or per setup
P=price per unit
H= holding cost per unit per year
 Steps for Quantity discount
Step1: Calculate optimal order quantity
_______
Q* = (2DS)/IP
Price is one of the factor in annual holding cost.
Here holding cost is not constant as the price per unit changes for
each quantity discount.
Holding cost as a percentage(I) of unit price (P) instead as a constant
per unit per year, H.

Step:2 After calculated Q*, adjust the order quantity upward to the
lowest quantity will qualify for the discount.

Step 3: Compute the total cost for every Q* determine in step 1 and 2.

Step 4: select the Q* that has the lowest total cost as in step 3.
It will the quantity that minimize the total cost.
Problem of EOQ with more than one price discounts
When there are n price discounts
Range of Quantity Purchase cost per unit
0 Q 1 < b1 K11
b1 Q2 < b2 K12
- -

- -
bn-1 Qn K1n
Where b1, b2, ... bn-1 are those quantity which determine the discount

Step 1: Compute Qn* . if Qn* bn-1 then the optimal order is

reached i.e Qn* .
Step-2: if Qn* < bn-1 compute Qn-1* bn-2 . Then the optimal order
determined by computing TC(Qn-1* ) and TC(bn-1 ).
Step-3: if Qn-1* < bn-2 compute Qn-2* bn-3 . Then the optimal order
determined by computing TC(Qn-2* ), TC(bn-2) and TC(bn-1 ).
Step-4: compute in this way until Q * b 0jn-1, then TC(Q
Problem:

A manufacturing concern required 2,000 units of a material per year.

The ordering costs are $10 per order. While carrying costs are $0.16
per year per unit of average inventory, the purchase price is $1 per
unit. Find the EOQ and total inventory cost. If a discount of 5 percent
is available for orders of 1,000 units or more but less than 2000 units,
should the manufacturer accept the offer? Also , if purchases a
single lot 2,000 units or more he has to pay $0.93 per unit.
What purchase quantity discount would you recommended?
Problem:

Whole Natural Foods sells a gluten-fee product for which the

annual demand is 5,000 boxes. At the moment it is $6.40 for each
box, carrying cost is 25% of the unit cost, ordering cost are $25.
A new supplier has offer to sell the same item for $6.00 if Whole
Natural Foods buys at least 3,000 boxes per order. Should the firm
stick with the old supplier or take advantage of the new quantity
discount?