Operations Management: Processes and Supply Chains, 12th Edition

Quantity Discounts

Quantity discounts, which are price incentives to purchase large quantities, create pressure to maintain a large inventory. For example, a supplier may offer a price of $4.00 per unit for orders between 1 and 99 units, a price of $3.50 per unit for orders between 100 and 199 units, and a price of $3.00 per unit for orders of 200 or more units. The item’s price is no longer fixed, as assumed in the EOQ derivation; instead, if the order quantity is increased enough, the price is discounted. Hence, a new approach is needed to find the best lot size—one that balances the advantages of lower prices for purchased materials and fewer orders (which are benefits of large order quantities) against the disadvantage of the increased cost ...