Wang distributors has an annual demand for an airport metal detector of 1,400 units. the cost of a typical detector to wang is $400. carrying cost is estimated to be 20% of the unit costs, and the ordering is $25 per order. if ping wang, the owner, orders in quantities of 300 or more, he can get a 5% discount on the cost of the detectors. should wang take the quantity discount?

Wang should take the quantity discount

Explanation:

Total minimum cost for both cases i.e. with and without discount is evaluated.

1.Without the discount

Demand - 1,400 units

Ordering cost - $25 per order

Cost of detector- $400

Carrying cost - 20%

Applying EOQ formula: √ (2*1,400*25)/(400*20%) = 29.580

Total cost = (400*1400) + (1400*25*2/29.580) = 562,366

2.With discount

Demand - 1,400 units

Ordering cost - $25 per order

Cost of detector i.e. 400 x 20%- $380

Carrying cost - 20%

Applying EOQ formula: √ (2*1,400*25)/(380*20%) = 30.3488

Applying variables to obtain total cost as in 1 above = 543,516.67

Therefore, since total cost is lower after the discount, Wang should take the quantity discount.

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