Business Studies – 4.4.1 Identify and classify costs | e-Consult

Current Cost:

Current unit cost = £10

Current annual usage = 2,000 units

Current annual cost = £10 x 2,000 = £20,000

Cost with Supplier's Offer:

Unit cost with supplier = £8

Minimum order = 500 units

Since the business uses 2,000 units per year, it needs to place multiple orders. The business should place enough orders to meet its annual demand while satisfying the minimum order requirement. In this case, it needs to place 4 orders of 500 units (4 x 500 = 2,000 units).

Calculate the total cost with the supplier's offer:

Total cost = Number of orders x Minimum order x Unit cost

Total cost = 4 x 500 x £8 = £16,000

Comparison and Advice:

The current annual cost is £20,000. The cost with the supplier's offer is £16,000. Therefore, the business should accept the supplier's offer. This will result in a saving of £4,000 per year (£20,000 - £16,000). The business should carefully consider the implications of placing multiple orders and ensure that it has sufficient storage space. However, the cost savings are significant enough to justify accepting the offer, provided the storage requirements can be met. The business should also consider the reliability of the supplier and the potential impact of any delays in delivery.