Valley, Inc., uses 400 lbs. of a rare isotope per year. The isotope costs $500 per lb., but the supplier is offering a quantity discount of 2% for ord... Accounting MCQs | Accounting MCQs

Valley, Inc., uses 400 lbs. of a rare isotope per year. The isotope costs $500 per lb., but the supplier is offering a quantity discount of 2% for order sizes between 30 and 79 lbs. and a 6% discount for order sizes of 80 lbs. or more. The ordering costs are $200. Carrying costs are $100 per lb. of material and are not affected by the discounts. If the purchasing manager places eight orders of 50 lbs. each, the total cost of ordering and carrying inventory, including discounts lost, will be

$1,600
$4,100
$6,600
$12,100Show Result

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Detailed Answer

Answer (D) is correct. Valley’s annual ordering costs are $1,600 ($200 per order × 8 orders per year , and the annual carrying costs are $2,500 ($100 per pound × 25 pounds average inventory). Gross annual product purchase cost is $200,000 ($500 per pound × 400 pounds annual usage). Because the differential discount lost is 4% (6% – 2%), annual discounts lost equal $8,000 ($200,000 × 4%). If the purchasing manager places 8 orders of 50 pounds each, Valley’s total cost can be calculated as follows: Annual ordering costs $ 1,600 Annual carrying costs 2,500 Annual discounts lost 8,000
Total cost $12,100