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Model IV - EOQ With Quantity Discounts

a) Inventory Model With Single Discount

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The purchase inventory model with single discount may be expressed as

follows:
Order Quantity

Unit Price (Rs.)

1 Q1 < b

P1

b Q2

P2

Following are the steps to summarize the approach.

Steps
1. Compute the optimal order quantity for the lowest price (highest
discount), i.e.,
(2DCo)
-------------ChP2

Q2* =

and compare the value of Q2* with the quantity b which is required to
avail the discount.
If Q2* b, then place orders for quantities of size Q2* and obtain
discount; otherwise move to step 2.
2. Compute Q1* for price P1 and compare TC(Q1*) with TC(b). The values
of TC(Q1*) and TC(b) may be determined as follows:
TC(Q1*) = DP1 + (D/Q1*) X Co + (Q1*/2) X Ch X P1

TC(b) =

DP2 + (D/b) X Co + (b/2) X Ch X P2

If TC(Q1*) > TC(b), then place orders for quantities of size b to get the
discount.

Example
A big cold drinks company, the Piyo - Pilao Company, buys a large number
of pallets every year, which it uses in the warehousing of its bottled
products. A local vender has offered the following discount schedule for
pallets:
Order Quantity

Upto 699
700 and above

Unit Price (Rs.)

10.00
9.00

The average yearly replacement is 2000 pallets. The carrying costs are
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The average yearly replacement is 2000 pallets. The carrying costs are
12% of the average inventory and ordering cost per order is Rs. 100.
Solution.

Given
D = 2000 pallets/year, Ch = 0.12, Co = Rs. 100, P1 = Rs. 10, P2 = Rs. 9.00
Step 1
The lowest price (highest discount) is RS. 9.00.
(2 X 2000 X 100)
---------------0.12 X 9

Q2* =

= 608.58 pallets/order
Since Q2* < b (i.e., 608 < 700), Q2* is not feasible.
Step 2
(2 X 2000 X 100)
---------------0.12 X 10

Q1* =

= 577.35 pallets/order
TC(Q1*) = TC(577.35) = 2000 X10 + (2000/577.35) X 100 + (577.35/2 ) X
0.12 X 10
= Rs. 20692.82
TC(b) = TC (700) = 2000 X 9 + (2000/700) X 100 + (700/2) X 0.12 X 9
= Rs. 18663.71
Since TC(b) < TC(Q1*) and hence the optimal order quantity is the price
discount quantity, i.e., 700 units.
b) Inventory model with double discount
Order Quantity

Unit Price (Rs.)

1 Q1 < b1

P1

b1 Q2 < b2

P2

b2 Q3

P3

Where b1 and b2 are the quantities, which determine the price discount.
Following are the steps to summarize the approach.

Steps
1. Compute the optimal order quantity for the lowest price (highest
discount), i.e., Q3* and compare it with b2
a. If Q3* b2, then place order equal to this optimal quantity Q3*
b. If Q3* < b2, then go to step 2
2. Compute Q2* and since Q3* < b2, this implies Q2* is also less than b2.
Thus, either Q2* < b1 or b1 Q2* < b2
a. If Q2* < b2, but b1, then proceed as in the case of single
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a. If Q2* < b2, but b1, then proceed as in the case of single
discount, i.e., compare TC(Q2*) and TC(b2) to determine the
optimal purchase quantity.
b. If Q2* < b2 and b1, then move to step 3
3. Compute Q1* and compare TC(b1), TC(b2) and TC(Q1*) to determine
the purchase quantity.

Example
A large dairy firm, the Cow and Buffalo Company, buys bins every year,
which it uses in the warehousing of its bottled products. A local vender
has offered the following discount schedule for bins:
Order Quantity

Upto 699
700 to 949
950 and above

Unit Price (Rs.)

10.00
9
8

The average yearly replacement is 2000 bins. The carrying costs are 12% of the
average inventory and ordering cost per order is Rs. 100.
Solution.
Given
D = 2000 bins/year, Ch = 0.12, Co = Rs. 100, P1 = Rs. 10, P2 = Rs. 9, P3 =
Rs. 8
Step 1
The lowest price (highest discount) is Rs. 8. Thus calculating Q3* =
corresponding to this range as follows:

Q3* =

(2 X 2000 X 100)
---------------0.12 X 8
= 645.49 bins/order

Since Q3* < b2 (i.e., 645.49 < 950), go to step 2 to determine

Q2*
Step 2

Q2* =

(2 X 2000 X 100)
---------------0.12 X 9
= 608.58 bins/order

Again, since Q2* < b2 and b1 (i.e., 608.58 < 950 &
700) go to step 3 to calculate Q1* and compare total
inventory cost corresponding to Q1*, b1 and b2.
Step 3

Q1* =

(2 X 2000 X 100)
---------------0.12 X 10
= 577.35 bins/order

TC(Q1*) = TC(577.35) = 2000 X10 + (2000/577.35) X 100 + (577.35/2 ) X

0.12 X 10

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0.12 X 10
= Rs. 20692.82

TC(b1) = TC(700) = 2000 X 9 + (2000/700) X 100 + (700/2) X 0.12 X 9

= Rs. 18663.71
TC(b2) = TC(950) = 2000 X 8 + (2000/950) X 100 + (950/2) X 0.12 X 8
= Rs. 16666.52
The lowest total inventory cost is TC(b2) = Rs. 16666.52 and hence the
optimal order quantity is the price discount quantity of 950 units, i.e., Q*
= b2 = 950 units.

Tw eet

Inventory Service

Inventory Control

It Inventory

Inventory Company

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