Volume Discount Break-Even Order Quantity Calculator
A supplier offers 5 percent off if you order 6,000 instead of 2,000. Does it pay once carrying cost is counted? This calculator compares total annual cost at your normal economic order quantity with the cost of buying at the price break.
Your numbers
Buyer time, receiving, inspection and payment processing per PO.
Capital, storage, insurance, obsolescence and shrinkage.
Your results
Classic EOQ model with constant demand and instant replenishment. It ignores shelf life, storage limits and price volatility, which can cancel a saving.
Annual saving vs discounted unit price
Sweeps Discounted unit price from 7.5 to 9, holding your other inputs fixed.
Price break checks inside your ERP
Optional: discuss surfacing break-even analysis on purchase requisitions from your own item and vendor data.
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How to use it
Enter annual demand, the cost to place an order and your annual carrying cost rate. Carrying cost should cover cost of capital, storage, insurance, handling and expected obsolescence, which usually totals 15 to 30 percent. Add the base price, the discounted price and the minimum quantity. The tool finds the cost at the standard EOQ and the cost at the price break, then reports the saving.
- Use a realistic order cost, not just buyer time
- Include obsolescence risk in the carrying rate
- Check shelf life before accepting a large buy
- Test several break levels using the chart
The method
Annual cost equals purchase cost plus ordering cost plus carrying cost. Ordering cost is orders per year times the cost per order. Carrying cost is average inventory, which is half the order quantity, times the carrying rate times the unit price. For the discounted option, the best quantity is the larger of the break quantity and the EOQ at the lower price, because ordering less than the break forfeits the discount and ordering more only adds carrying cost when the EOQ is below the break.
Reading the result
With the defaults, the saving is positive because the 5 percent discount on 24,000 units outweighs the additional inventory held. If the saving is small relative to risk, decline: price breaks that need a year of supply to pay are bets on demand, not savings. Compare the days of supply per order to part shelf life and to engineering change risk before committing.
Common mistakes
Using a low carrying rate is the usual error and it makes every break look attractive. Another is ignoring storage capacity or the cash tied up. Remember that the model assumes steady demand, so parts with lumpy or declining demand need a more cautious view. Document the analysis with the PO so that approvers can see why a larger quantity was bought.
Frequently Asked Questions
What carrying cost percentage should I use?
Add your cost of capital, storage and handling, insurance, taxes and an obsolescence allowance. For most manufacturers the total lands between 15 and 30 percent per year. Finance can usually confirm the capital component.
Why use the larger of break quantity and EOQ?
If the EOQ at the discounted price is above the break quantity, buying exactly the break would order too often. If it is below, ordering the break quantity is the cheapest way to qualify for the discount.
Does this work with several price breaks?
Run it once per break against the base price and pick the highest saving. A full all-units schedule can be tested the same way by changing the discounted price and minimum quantity each time.
What if demand is uncertain?
Stress the demand input down by 20 to 30 percent and rerun. If the saving disappears, the break depends on forecast accuracy and carries real risk of excess stock.
Netray can build this check into your ERP buying workflow, so planners see a break-even answer next to every supplier quantity break.
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