Calculate Optimal Order Quantity with Quantity Discount for Extra Strength Tylenol Caplets

Understanding Quantity Discounts in EOQ Analysis

Quantity discounts are common incentives offered by suppliers to encourage bulk purchases. In the case of Walmart and Johnson & Johnson, a 4 percent discount is offered if Walmart orders an integer number of pallets containing Extra Strength Tylenol caplets. Incorporating this discount into the EOQ analysis requires careful evaluation to minimize overall costs.

Steps for EOQ Analysis with Quantity Discount

1. Evaluate EOQ Given Regular Price: Determine the optimal order quantity (Q) that minimizes ordering and holding costs without considering the discount.

2. Compare EOQ to Discount Threshold: If the EOQ (Q) is greater than the threshold needed for the quantity discount (Qd), evaluate the EOQ given the discount price to determine the new order quantity (Q').

3. Cost Comparison: Compare the total costs of ordering Q at the regular price with the total costs of ordering the minimum threshold to obtain the discount (qQd) to make a cost-effective decision.

Optimizing Order Quantity

By carefully evaluating the EOQ at regular and discount prices, Walmart can determine the optimal order quantity for Extra Strength Tylenol caplets that minimizes costs while taking advantage of the quantity discount offered by Johnson & Johnson. This strategic approach ensures efficient inventory management and cost savings for the distribution center.