M7_IND3. Floral Beauty, Inc., is a large floral arrangements store located in Asheville Mall. Bridal Lilies, which are a specially created bunch of lilies for bridal bouquets, cost Floral Beauty $19 each. There is an annual demand for 22,000 Bridal Lilies. The manager of Floral Beauty has determined that the ordering cost is $85 per order, and the carrying cost, as a percentage of the unit cost, is 14%. Floral Beauty is now considering a new supplier of Bridal Lilies. Each lily would cost only $17.50, but to get this discount, Floral Beauty would have to buy shipments of 2,000 Bridal Lilies at a time.

Should Floral Beauty use the new supplier and take this discount for quantity buying?

Use or Accept

Result in Incremental benefits of $32,559

Explanation:

Step 1 Calculate the Economic Order Quantity (EOQ)

EOQ = √ (2*Total Demand*Ordering Cost) / Holding Cost

= √ (2 * 22,000 * $85) / $19*14%

= 1186

Step 2 Decide whether benefits exceeds the cost if company moves from EOQ to purchasing larger quantities

Calculation of Savings

Savings in Purchasing Price ($1.50*22,000) 33,000

Savings in Ordering Costs

(22000 / 1186*$85) - (22000 / 2000*$85) 642

Total Savings 33,642

Additional Holding Costs

((1186-2000) / 2) * ($19*14%) (1,083)

Incremental Benefit / (Cost) 32,559

Using new supplier would result in Incremental benefits of $32,559. Therefore, use the new supplier and take this discount for quantity buying.