PR Ltd. sells two types of pen, ball pen and gel pen. Currently, the company is expecting to sell 6,000 units of ball pen along with 3,600 units of…

(i) Economic order quantity (EOQ) as calculated by the company's managing director EOQ = √(2AO/C) Where: A = annual inventory requirement = 2,50,000 drumsO = ordering cost per order = 100C = carrying cost per unit per annum = 180 + (10% of 200) = 180 +20 = 200 EOQ = √(2 × 2,50,000 drums × 100 / 200) EOQ = √(5,00,00,000 / 200) EOQ = √2,50,000 EOQ = 500 units (ii) Comparison of total cost considering purchasing manager's bonus and supplier quantity discounts Particulars At EOQ of 500 units (₹) If considered quantity discount at 1000 units (₹) Ordering Cost [(2,50,000 units/500 units) × 100] 50,000 [(2,50,000 units/1000 units) × 100] 25,000 Carrying Cost {500 units/ 2 x [(180 + (10% of 200)]} 50,000 {1,000 units/ 2 x [(180 + (10% of 199.60)]} 99,980 Purchasing manager's bonus 10% of (₹ 2,00,000 - 1,00,000) 1,00,000 10% of (₹ 2,00,000 - 1,24,980) 1,24,980 Annual inventory cost 2,50,000 units x 200 5,00,00,000 2,50,000 units x 199.60 4,99,00,000 Total Cost 5,01,10,000 5,00,32,482 In above comparison, the potential savings from purchasing in bulk outweigh the higher carrying costs associated with holding more inventory. Thus, Catalist Ltd. may look forward to the quantity discount offered at 1,000 units.