Exhibit Palmer Pens
Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost.
Refer to Exhibit Palmer Pens. Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 gallons. Should Palmer increase its ordering quantity to take the discount?
A. Yes; it will save $827 if it takes the discount.
B. No; it will lose $827 if it takes the discount.
C. Yes; it will save $14,400 if it takes the discount.
D. Yes; it will save $13,573 if it takes the discount.
E. No; it will lose $13,573 if it takes the discount.
Answer: D
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