The Lex Glass Company uses silica in the production of three different lines of glassware. The company plans to introduce a new line of glassware without expanding its present facilities. The company wants to purchase the required silica at a lower price to increase its profits. The present purchase price of silica is $2 per ton, and the company consumes approximately 120,000 tons per year. Silica is used at a fairly uniform rate throughout the year. The company's policy has been to place an order for materials once a month and to maintain a minimum inventory of 5,000 tons. This represents one half of one month's consumption and results in an average inventory of 10,000 tons (1/2 of the 10,000-ton monthly requirement + 5,000 ton minimum).
Other firms in the same industry and the same manufacturing area purchase the silica in small lots for $2.20 a ton. The purchasing manager contacted suppliers and determined that a price of $1.80 per ton can be obtained if the company purchases 400,000 tons of silica or more a year. The purchasing manager then contacted other manufacturers in the area and offered to sell silica to them for $2 a ton. Most of the manufacturers accepted the offer; however, they asked the purchasing manager to keep an inventory of at least one half of one month's consumption in storage at all times to be available for their use. The annual consumption of these manufacturers is expected to be 300,000 tons per year, and consumption is expected to be uniform each month. Lex Glass plans to continue its once-a-month ordering policy.
To handle the additional volume of silica required by these other manufacturers, Lex Glass will need to increase its labor force at an annual cost of $20,000 and incur $10,000 of additional administrative expenses annually. The company can borrow the additional funds necessary from the local bank at an interest rate of 5%. The additional materials can be stored in a company-owned warehouse, which is now being leased to another company for $10,000 a year.
Required:
Determine whether the Lex Glass Company should take advantage of the quantity discount.