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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?

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Thank you for posting your question here. I hope the answer helps. 
If Ping Wang, the owner, orders in quantities of 300 or more, he can get a 5% discount on the cost of the detectors. I think yes, Wang should take the quantity discount.

PGAMUKAMA

Answer:

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: √ (21,40025)/(40020%) = 29.580

Total cost = (4001400) + (1400252/29.580) = 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: √ (21,40025)/(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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