Volume discount decisions: Wealth maximization or EOQ approach?

A recent paper finds that when volume discounts are available, in some cases, reliance on the Economic Order Quantity (EOQ) model can induce purchasers to make wealth reducing decisions, and the Present Value (PV) approach should be preferred. While this finding is theoretically correct, the magnitudes of wealth reductions suggested by the paper's numerical examples seem to be questionable. Furthermore, the paper also finds that, in some other cases, a purchaser using the EOQ approach realizes a net increase in current wealth compared to a purchaser using the PV approach. Logic suggests that such a finding cannot be correct, since by its very definition, it is the PV approach that seeks to maximize the current wealth. We offer an alternative frame of comparison and a modified model to show that, under the paper's assumptions, the EOQ approach can never realize a net increase in current wealth compared to the current wealth generated by the PV approach. On the other hand, we also show that when typical values of the relevant parameters prevail, the additional costs imposed by the EOQ approach are not significant. Finally, we suggest that insofar as the PV approach requires greater administrative costs to implement, it may even be counterproductive to the goal of wealth maximization. © 1998 John Wiley & Sons, Inc. Naval Research Logistics 45: 377–389, 1998