BF manufactures a range of domestic appliances. Due to past delays in suppliers providing goods, BF has had to hold an inventory of raw materials, in order that the production could continue to operate smoothly. Due to recent improvements in supplier reliability, BF is re-examining its inventory holding policies and recalculating economic order quantities (EOQ).
Item “Z” costs BF $10.00 per unit
Expected annual production usage is 65,000 units
Procurement costs (cost of placing and processing one order) are $25.00
The cost of holding one unit for one year has been calculated as $3.00
The supplier of item “Z” has informed BF that if the order was 2,000 units or more at one time, a 2% discount would be given on the price of the goods.
Requirements
(i) Calculate the EOQ for item “Z” before the quantity discount.
(ii) Advise BF if it should increase the order size of item “Z” so as to qualify for the 2% discount.