Quantity Discount Model

The Integrated Products Corporation (IPC) is developing ordering policies for materials that it stocks for resale to its customers. One of the items is a TS500 component.

a. IPC purchases the TS500 for $24.95 per unit. The forecast of the customer demand for this component is 10,000 units annually. IPC estimates that each unit carried in inventory has a carrying cost of 40% of the purchase price per year. It costs $100 to process, receive, and inspect an order for these components. IPC uses a fixed order quantity inventory system for this component. How many of the TS500 units should be ordered when the components are replenished? (Assume IPC works 300 days per year)

b. The supplier of the TS500 component has agreed to give IPC a "quantity discount" according to the following schedule:

Parts ordered per order Price per Part
1-999 $24.95
1,000-4,999 $24.85
5000+ $24.80

If all other data part a. above remain the same, how many TS500 components should be ordered when the components are replenished? What annual savings will IPC realize as a result of quantity discounts?

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