Dictionary of Accounting Terms: quantity discount model
quantity discount model
form of an economic order quantity (EOQ) model that takes into account quantity discounts. Quantity discounts are price reductions designed to induce large orders. If quantity discounts are offered, the buyer must weigh the potential benefits of reduced purchase price and fewer orders against the increase in carrying costs caused by higher average inventories. Hence, the buyer's goal in this case is to select the order quantity that will minimize total costs, where total cost is the sum of carrying cost, ordering cost, and purchase cost:
where C = carrying cost per unit, O = ordering cost per order, D = annual demand, P = unit price, and Q = order quantity.
