I find the lectures very helpful.I am confuse about the purchase and order cost both are buying then why cost is different?please help me out .thank you

John,
Chapter 5, Test Q 4 = Answer says C, however I cannot get to this figure

2 x 9,000 x 40
Divded by (8% of 40) 3.2
sqrt = 464 + 160 (being charge for placing the order)
obviously does not come to 949
please could you advice and apologies i fear i should know this… thank you
sam

Thank you for the lectures. When i was doing a few examples from kaplan study text, I noticed that the the discount was not applied when calculating the holding cost, it was only applied on the purchase cost. So I am a bit confused whether to apply the discount whilst calculating holding cost. Please clarify? Thanks

It depends how the holding cost is given. If it is given as a $ amount per unit (e.g. holding cost is $2 per unit), then it stays at that amount even if there is a discount on the purchase price.
If the holding cost is given as a % of the purchase price, then as the discount reduces the purchase price it also reduces the holding cost.

If there is no discount, then if you are buying 40,000 a year at a cost of $25, then the total purchase price is $1,000,000.

If there is a discount of 1% then the total purchase price is $1M less 1% (or $1M x 99%).

Also, the total order cost is not $160 a year!! If they are ordering 40,000 a year with an order quantity of 800, then they are placing 40,000/800 = 50 orders a year.

I do suggest that you watch the lecture again because you seem to be confusing all of the figures.
The answer and the approach in the lecture is correct!

John, in the exam. at minute 25:00. The holding cost price after discount is 2.4625. Do we have to put it into 4 decimal places or 3? or if there more decimal places, do we have to put all of the numbers?

erica says

I find the lectures very helpful.I am confuse about the purchase and order cost both are buying then why cost is different?please help me out .thank you

John Moffat says

Purchase cost is the amount being charged for the goods themselves.

Order cost is the cost of actually making the order (for example, the cost of delivery; the cost of the paperwork involved in placing an order).

erica says

thank you for making me clear about my confusion

Sam says

John,

Chapter 5, Test Q 4 = Answer says C, however I cannot get to this figure

2 x 9,000 x 40

Divded by (8% of 40) 3.2

sqrt = 464 + 160 (being charge for placing the order)

obviously does not come to 949

please could you advice and apologies i fear i should know this… thank you

sam

John Moffat says

Your mistake is the order cost.

It should be 2 x 9,000 x 160 (not 40)

Divide by 3.20

So square root of ((2 x 9,000 x 160) / 3,20 ) = 949

Sam says

Thank you…

Naseef says

Mr John,

Thank you for the lectures. When i was doing a few examples from kaplan study text, I noticed that the the discount was not applied when calculating the holding cost, it was only applied on the purchase cost. So I am a bit confused whether to apply the discount whilst calculating holding cost. Please clarify? Thanks

John Moffat says

It depends how the holding cost is given. If it is given as a $ amount per unit (e.g. holding cost is $2 per unit), then it stays at that amount even if there is a discount on the purchase price.

If the holding cost is given as a % of the purchase price, then as the discount reduces the purchase price it also reduces the holding cost.

Naseef says

Thank you very much for taking the time to reply. I understand the logic now. Good day.

S says

Mr. John,

Kindly advice me on the following;

where D= 40,000 Purchase price= $25 Ordering cost= $20 Holding cost= $2.5

EOQ= 800 units

Purchase price = $ 1,002,000

Ordering cost = 8*20 = $ 160

Holding cost = 10% of 25 of 99% = 2.48* 2500 = 6,187.5

When we order between 5,000- < 10,000

Purchase price you have calculated by 40,000*99% *25 = $ 990,000

But I have calculated in other way 1,002,000*99% = $ 991,980

Why the difference of $ 1,980 arises?

I have worked for some other questions both the way I'm getting the same answer.

Am I going wrong anywhere?

Please help me

John Moffat says

I don’t know where you have got 1,002,000 from!

If there is no discount, then if you are buying 40,000 a year at a cost of $25, then the total purchase price is $1,000,000.

If there is a discount of 1% then the total purchase price is $1M less 1% (or $1M x 99%).

Also, the total order cost is not $160 a year!! If they are ordering 40,000 a year with an order quantity of 800, then they are placing 40,000/800 = 50 orders a year.

I do suggest that you watch the lecture again because you seem to be confusing all of the figures.

The answer and the approach in the lecture is correct!

S says

Thank you Mr.JohnJohn

I went wrong in calculating purchase price ( It’s only $1m and not $1,002,000)

protoblade says

John, in the exam. at minute 25:00. The holding cost price after discount is 2.4625. Do we have to put it into 4 decimal places or 3? or if there more decimal places, do we have to put all of the numbers?

John Moffat says

For an exercise on quantity discounts it is best to use the exact figure.