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Annual demand for window frames is 10000. Each frame costs Rs. 200 and ordering cost is Rs. 300 per order. Inventory holding cost is Rs. 40 per frame per year. The supplier is willing to offer 2% discount if the order quantity is 1000 or more, and 4% if order quantity is 2000 or more. If the total cost is to be minimized, the retailer should

1. order 200 frames every time
2. accept 2% discount
3. accept 4% discount
4. order Economic Order Quantity

Correct answer: accept 4% discount

Solution

Accepting the 4% discount is the best option because it reduces the overall cost per frame significantly when ordering in larger quantities, which aligns with the goal of minimizing total costs. This discount, combined with the optimal order quantity, leads to lower purchasing and holding costs.

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