Question: The Orange Blossom Bridal Shop stocks flowered ribbon for which the annual demand is 6,000 rolls. Each roll costs $ 12.50 and the order cost is $75 per order. Carrying costs are $2 per roll per year. The Bridal Shop is currently basing its ordering on the economic order quantity. Recently, the wholesaler, Slick & Company, in an effort to shift some of its inventory to the Bridal Shop, has pointed to the high ordering cost of $75 and has suggested that orders be placed only once a year. As an inducement, Slick offers a 5-percent discount if the annual ordering policy is adopted.
(a) Based on this offer, should the Bridal Shop change its current ordering policy? Show the calculations upon which you base your recommendation.
(b) If you reject the offer, what reasonable counteroffer (in terms of the magnitude of the discount) might you make so as to accept annual ordering?