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# EOQ with

Price
Breaks
NO NAME ROLL NO

## 5 SANYAM AGRWAL 4087

One assumption in previous EOQ model was that the cost of the item was
not affected by order size.
Quantity discount often are offered for externally purchased items to
encourage the buyers to purchase more units of item.
In such a situation, it is necessary to evaluate the economic trade-off
between the savings in purchase cost and ordering cost and the increase
cost of holding inventory, quantity discounts are usually offered in one of
the following two ways:
1. All units quantity discounts
2. Incremental or marginal unit quantity discounts
ASSUMPTIONS

## Demand is known and constant

Shortage is not allowed
Replacement is instantaneous
What is Price Break?
Price Break refers to the various quantities at which the
price per unit changes.
Eg.-
Price Quantity
Co if Q<q1
C1 if q1 Q q2
C2 if q2 Q q3
C3 if q3 Q q4

: :

Cn-1 if Q qn
How is the buying decision affected?
TC = DC + [(D/Q*)Co] + [(Q*/2)Ch]
where,
TC = Total cost
D= Annual Demand
C= Cost of item (per unit)
Q* = Quantity ordered (per order)
Co = Ordering cost (per order)
Ch = Handling cost (per unit per year)
EOQ without Price Break
EOQ with Price Break
TC = DC + [(D/Q*)Co] + [(Q*/2)Ch]

When the benefit of price breaks is taken, and more units are purchased, the
DC reduces as the D remains same, but C (price per unit) goes down.
As more units are ordered per order, the number of orders to be placed
reduces and thus the [(D/Q*)Co] reduces as the ordering cost per order
remains same.
As more units are ordered per order, the average inventory level increases
and hence [(Q*/2)Ch] increases.

## We chose Q* that has a lower Total Cost.

Single Price Break Model
In single price break model, the price of the product to be purchased changes
only at one level of quantity. The price remains same for all the quantities
below it and a discounted same price prevails for all the quantities above the
price break quantity.

Eg.-
Price Quantity
Co if Q<q1
C1 if q1 Q
Example Of Single Price Break Model
The annual demand of a product is 10,000 units. Each unit costs
Rs. 100, if order placed in quantities below 200 units but for
orders of 200 units or above the price is Rs.95. The annual
inventory holding cost is 10% of the value of the item and the
ordering cost is rs.5 per order. Find the economic lot size.
From the data in usual notions we have,

## D=10,000 units/year, Co= Rs.5/order

r=10% (r refers to the holding cost as % of price)
Multiple Price Break Model

In multiple price break model, the price of the product to be purchased changes at various
levels of quantity. The price remains same for any quantity in a given bracket.

Eg.-
Price Quantity
Co if Q<q1
C1 if q1 Q q2
C2 if q2 Q q3
C3 if q3 Q q4
: :

Cn-1 if Q qn
Example Of Multiple Price Break Model
Annual requirement (D) = 2,000 units
Ordering Cost (Co) = Rs. 50 per order
Holding Cost (Ch) = 25% of stock value
Cost per unit = Rs. 10

## Q* = = = 283 units (approx.)

TC = DC + [(D/Q*)Co] + [(Q*/2)Ch]
= 2000*10 + [(2000/283)50] + [(283/2)2.5]
= Rs. 20,707.10
Further, If there is quantity discount as follows-
10% discount for orders between 400 and 699 units
20% discount for orders of 700 units and above

Price Quantity Ch
10 if Q 399 2.5 per unit
9 (10% discounted) if 400 Q 699 2.25 per unit
8 (20% discounted) if 700 Q 2 per unit
Q*

## based on price Rs. 9 is

Q* = = = 298 units (approx.)
As this falls in our first range, we convert it to
the starting point of our second range that is 400
units
TC = DC + [(D/Q*)Co] + [(Q*/2)Ch]
= 2000*9 + [(2000/400)50] + [(400/2)2.25]
= Rs. 18,700.00
Q*

## based on price Rs. 8 is

Q* = = = 316 units (approx.)
As this falls in our first range, we convert it to
the starting point of our third range that is 700 units
TC = DC + [(D/Q*)Co] + [(Q*/2)Ch]
= 2000*8 + [(2000/700)50] + [(700/2)2]
= Rs. 16,842.86
TC (283) = Rs. 20,707.10
TC (400) = Rs. 18,700.00
TC (700) = Rs. 16,842.86