The accounting firm of AJ Taylor buys USB thumb drives from a distributor of PC supplies. The firm uses approximately 5000 drives per year at a fairly constant rate. The distributor offers the...

The accounting firm of AJ Taylor buys USB thumb drives from a distributor of PC supplies. The firm uses approximately 5000 drives per year at a fairly constant rate. The distributor offers the following quantity discount. If fewer than 500 drives are ordered, the cost per drive is $30. If at least 500 but fewer than 800 drives are ordered, the cost per drive is $28. If at least 800 drives are ordered, the cost per drive is $26. The fixed cost of placing an order is $100. The company’s cost of capital is 10% per year, and there is no storage cost. The firm wants to find the optimal order quantity and the corresponding total annual cost.

Objective To find the order quantity that minimizes the total annual cost of ordering in the face of quantity discounts.