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

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

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 $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 $ / unit
Order 5 to less than 50 5% discount / unit
Order 50 to less than % 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!