PM : SEPTEMBER-OCTOBER 2002
Bogner is an Operations Research Analyst, U.S. Army Communications-Electronics Command (CECOM)
System Analysis Office, and Project Manager, Warfighter Information Network—Tactical (PM WIN-T), Fort
Monmouth, N.J. Price is a Senior Systems Analyst, CECOM System Analysis Office. Wong is an
Engineer/Operations Research Analyst, CECOM System Analysis Office.
96
W
e don't always buy the low-
est total cost quantity when
we buy a quantity-dis-
counted item. We often
spend more than we
should. This article will show how to
buy the lowest total cost quantity, save
the buyer money and, in some cases, re-
ceive more goods.
Contractors offer quantity discounts.
When we buy more of an item, we pay
a lower unit cost. However, we should
be interested in the total purchase cost
(quantity x unit cost). With quantity dis-
counts, the lowest total cost quantity
can frequently be a larger quantity than
typically bought. Let us clarify with an
example.
An electronics supplier offered an item
at the following range quantities and
unit prices:
Quantities
Unit Prices
1-29
$24,484 each
30-59
$7,059 each
60 and up
$6,553 each
How much would you pay for 10 of
these items?
For a one-time buy of 10, the total cost
would be 10 x $24,484 or $244,840.
However, there is a better solution. If
we bought 30, we would pay 30 x
$7,059 or $211,770. We save $33,070
and obtain 20 more. Let's say we needed
17. Although 17 cost $416,228, we
could
buy 30 at a cost of
$211,770 or 60 at a cost of
$393,180.
If we needed to purchase 10 every
month, we could buy 10 monthly at a
yearly cost of $2,938,080. But by buy-
ing 30 units four times a year the cost
would be $847,080, and two groups of
60 would cost $786,360. We would
offer that many of us would not take the
added step to calculate these alternative
lower cost solutions.
If your purchasing/inventory system
does not offer these lower total cost so-
lutions, our user-friendly spreadsheet
can assist in the process of dealing with
quantity discounts and the other costs
associate