) A firm wants a buyer adjust their purchasing amount andfrequency by changing the price it charges so that they purchasethe target times per year. For example, if the firm purchases 10times a year a firm might want it to purchase 5 times yearlyinstead. The firm recognizes that an incentive will have to beoffered to do this and has set the incentive as the amount thepurchaser would save in total (based on total material cost as usedin inventory analysis) from the current cost to the purchaser. Dataon the customer is given below as well as the target savingsidentified the firm thinks is required to get the purchaser tochange their buying pattern.
Current Order Amt | Order per Year | Current Price | Order Cost | Holding % | Target Orders/ yr | Incentive Savings |
200 | 17 | 125.00 | 400.00 | 40.0% | 4 | 4,000.00 |
NOTE: The customer may not be applying EOQ to its currentordering quantity and frequency.
a. What is the total annual cost to the customer of the currentordering policy?
b. What is the highest price the seller can offer the customerso the customer orders 4 times yearly and meets the targetedsavings?
