Ch. 13: Quantity Discounts

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Last updated 6:23 PM on 4/23/26
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13 Terms

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Discount

  • Incentive that encourage larger orders through price reduction

  • Minimize annual holding costs

  • Improve relationships with sellers and buyers

  • : Tiered, bulk

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Lot Based Discount

Given to specific single order quantity

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Volume Based Discount

Applied to the total quantity purchased over a defined period

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All-Units Quantity Discount

Applied to every unit until order quantity exceeds a threshold.

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Incremental Quantity Discount

Applied only to the units exceeding the threshold

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Incremental Quantity Discount

Applied only to the units exceeding the threshold

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All-Unit Quantity Discounts

  • Pricing Schedule has specified quantity break points

  • If an order is placed that is at least as large as qi but smaller than qi+1, then each unit has an average unit cost of Ci

  • Unit cost decreases as the quantity increases

<ul><li><p>Pricing Schedule has specified quantity break points </p></li><li><p><span style="font-size: calc(var(--scale-factor)*27.98px);"><span> If an order is placed that is at least as large as q</span></span><span style="font-size: calc(var(--scale-factor)*18.74px);"><span>i </span></span><span style="font-size: calc(var(--scale-factor)*27.98px);"><span>but smaller than q</span></span><span style="font-size: calc(var(--scale-factor)*18.74px);"><span>i+1</span></span><span style="font-size: calc(var(--scale-factor)*27.98px);"><span>, </span></span><span style="font-size: calc(var(--scale-factor)*27.96px);"><span>then each unit has an average unit cost of C</span></span><span style="font-size: calc(var(--scale-factor)*18.72px);"><span>i</span></span></p></li><li><p><span style="font-size: calc(var(--scale-factor)*18.72px);"><span>Unit cost decreases as the quantity increases</span></span></p></li></ul><p></p>
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Two Part Tariff

  • Part 1: Manufacturer recovers cost

  • Part 2: Fixed

  • Manufacturer sells each unit at $unit price but adds a fixed charge of $ price to do business with the retailer

  • Only makes money from fixed charge

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Inventory Model with Quantity Discount

  • Analysis to determine if the order quantity will min. Total cost

  • = procurement cost+carrying cost+material cost

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Total Cost Formulation

= Purchase Cost (PD)+Ordering Cost(S D/Q) +Holding Cost (H Q/2)

  • D: Annual demand

  • Q: Order Quantity

  • C: Price per unit

  • S: Cost per order

  • H: Holding

    • Ic: % of unit cost

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Total cost based on Quantity Discount

  1. Calculate EOQ for each price level

  2. Adjust for lowest feasibility quantity in that pice bracket

  3. Calculate TC with each Q

  4. Select with provides lowest TC

<ol><li><p>Calculate EOQ for each price level </p></li><li><p>Adjust for lowest feasibility quantity in that pice bracket </p></li><li><p>Calculate TC with each Q</p></li><li><p>Select with provides lowest TC</p></li></ol><p></p>
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Trade Promotions

  • Discourage retailer to forward buyer in the supply chain

  • Counter measures

    • EDLP (everyday low pricing

    • Scan based promotion

    • Customer coupons

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Cycle Inventory Reduction

  • Reduce transportation production lot sizes

  • Aggregate the fixed costs across multiple products, supply points, or delivery points