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3/21: The Quantity Discount Model

3/21: The Quantity Discount Model. Roll call, return homework, collect homework Review EOQ model Quantity Discount Model Small group exercise Homework. Review EOQ Model. TC = Ann. Hold. Cost + Ann. Order Cost Ideal Order Quantity (EOQ) Cycle Time. EOQ Model: Curves.

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3/21: The Quantity Discount Model

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  1. 3/21: The Quantity Discount Model • Roll call, return homework, collect homework • Review EOQ model • Quantity Discount Model • Small group exercise • Homework

  2. Review EOQ Model • TC = Ann. Hold. Cost + Ann. Order Cost • Ideal OrderQuantity(EOQ) • Cycle Time

  3. EOQ Model: Curves • The EOQ will be the quantity that minimizes the overall annual cost. Annual Cost Combined curve: holding + setup. Minimum annual cost Holding cost curve Setup cost curve Optimal order quantity Order Quantity

  4. C1 C2 C3 Q1 Q2 Q3 Quantity Discount Model • Often, there are price breaks for ordering greater quantities of a product. • The formulas used to determine the EOQ remain, but…

  5. C1 C2 C3 Q1 Q2 Q3 Quantity Discount Model • Often, there are price breaks for ordering greater quantities of a product. • EX: Q1 < 1000 units C1 = $4.03 1000 <= Q2 < 2000 C2 = $4.00 2000 <= Q3 C3 = $3.97

  6. Quantity Discount Model • Calculate the Q* for each price. • If the Q* is out of the range of the price level, use the nearest point possible. • Calculate the total cost of the system (not just inventory system) to see which is lowest. • Must include the cost of product to compare!

  7. Example • You order a product that has a price break offered: • Order less than 1000 $4.03 / unit • Order 1000 to less than 2000 $4.00 / unit • Order 2000 or more $3.97 / unit • Your annual holding cost rate is 10% • Your cost per order is $5.00 • Your annual requirement is 5,000 units. see spreadsheet

  8. Group Exercise • You order a high-demand software package that has a price break offered: • Order less than 5 $169.00 / unit • Order 5 to less than 50 5% discount / unit • Order 50 to less than 100 8% discount / unit • Order 100 or more 10% discount / unit • Your annual holding cost rate is 30% • Your cost per order is $ 5.00 • Your annual requirement is 2,500 units.

  9. Homework (due 4/4) • Ch. 11 #20, 21, 22 (show your work) • You can use Excel to do this, or do it by hand. TURN IT IN ON PAPER REGARDLESS on 4/4. • No class next week – Holy Thursday. Happy Easter!

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