Answer:
Store should take the advantage of discount.
Explanation:
Economic order quantity is the level of units ordered which minimize the total cost.
The economic order quantity (EOQ) is computed by applying the following formula
EOQ = [ ( 2DO ) / H ]^1/2
where D = Annual Demand in units = 1,000
S = Setup or ordering cost = $1,150
H = Holding or carrying cost per unit, per year = $115
EOQ = [ ( 2 x 1,000 x $1,150 ) / $115 ]^1/2
EOQ = [ $2,300,000 / $115 ]^1/2
EOQ = 20,000^1/2
EOQ = 141.42 units
Cost of EOQ
Purchasing cost = 1,000 x $810 = $810,000
Ordering cost = (1,000 / 141.42) x $1,150 = $8,132
Carrying cost = ( 141.42 / 2 ) x $115 = $8,132
Total cost = $810,000 + $8,132 + $8,132 = $826,264
Cost of Discount
Purchasing cost = 1,000 x $810 x 80% = $648,000
Ordering cost = (1,000 / 151) x $1,150 = $7,616
Carrying cost = ( 151 / 2 ) x $115 = $8,683
Total cost = $648,000 + $7,616 + $8,683 = $664,299
Store should take the advantage of discount because it incurs lower cost.
