Inventory Control (part c) Quantity Discounts Example 3

1. says

Hi Sir

Thank you very much for the lectures,they seem to be a great help.I am just revising work capital and I have come across buffer stock in a few exam questions.i am not sure if I have missed something in the notes/lectures but I have not come across it?

• says

I don’t mention it in this lecture but I do mention it is the revision lectures.

All that buffer (or safety) inventory is, is carrying extra inventory all year to be safe (in case for example that a new delivery is late arriving). It does mean paying more holding cost for the extra, but it doesn’t affect the EOQ calculations.

2. says

hi sir
is re order level and lead time (constant and uncertain demand ) out of our syllabus ?
I find those those topic bit difficult to deal with :/

• says

They can be asked. You can find about reorder level and lead time in the revision notes and lectures.

• says

Okay thankyou sir

3. says

Hello Sir,
as you said when on the question will mention that eg: inventory cost per unit is \$2.5, then when we will calculate the holding cost for discounted quantity, that time we dont need to deduct the discount rate form the inventory cost per unit? thats what u tried to meant?

• says

Inventory costs are either given as a fixed amount per unit (in which case it does not change if a discount on the purchase price is given) or instead it is given as a percentage of the purchase price (in which case it obviously does change if the purchase price is lower because of a discount).

• says

got it, thank you sir……:)

4. says

Hi Sir,

Earlier I asked why on example 3 there is 99%, I hadn’t realised it’s the discount of 1%, please ignore me.

Jefzen2610

5. says

Hi Sir,

Looking at the answer for Example 3, I would like to know why it has 99% to a purchase cost, could you please explain as I’m puzzled.

Thanks

6. says

hello john………..I have got a scientific calculator, and its quite big….however on some calculations it represents the answer as a E – 03 or something….can you please tell me what this represents? or do you have any other solution to this problem? thank you in advance.

• says

The same happens with my calculator

However, do not worry – if you carry on and take the square root (I assume that you are trying to calculate the EOQ) then it will provide you with a normal number

• says

Ok so for example if i do 0.1 divided by 250, it gives me a answer of 4.e-04 on my calculator……On my phone it gives me a answer of 0.0004…….. how do I get the same number on my calculator exactly? Ive tried taking the square root, but im having no luck…

Thanks

7. says

Insightful. I was always getting the Holding cost calculation wrong. Good Lecture.

8. says

I just finished watching the lecture and i dont understand why the discount applies to holding costs and purchase costs but not to re order costs.

• says

The discount only applies to the purchase price.

It will affect the holding cost but only because the holding cost is a % of the purchase price in this question. If the purchase cost is lower then obviously the holding cost in this case will be lower.

There is no reason at all why the order cost should be affected. If we are charged (say) \$100 for delivery, then just because the purchase price is lower, it will not mean that the delivery cost is lower.

9. says

Why the best re-order qty is 5000 units. what if we order less than 10,000 more than 5000?

• says

I do deal with this in the lecture.

Think about the graph that I drew.

The EOQ is where the total inventory costs are at a minimum. At any other level the total inventory costs will be higher.
If we order 10,000 then it could be worth having the higher inventory costs because we will get the discount on the purchase price – the only way we can check is by costing out.

However, if we ordered (say) 7,000, then the total inventory costs will be higher than at the EOQ. We will still be having to pay the same purchase price, so it cannot possibly be better that the EOQ.

The best is always the cheaper of the EOQ and the levels at which we first get a discount. No other levels could possibly be better.

• says

OK…now that thing is clear in my mind..may be need some practical examples..
Thanks alot.

10. says

Why the Re-order cost is fixed? As the more qty we order the more delivery charges will be.

• says

Usually in the exam (and in this question) the re-order cost is given as a fixed amount e.g. \$20 per order. In this case we assume that it will remain at \$20 per order whatever the size of the order.

In practice, it could change with the size of the order, but even then it would not be relevant.

Suppose the reorder cost was a fixed \$20 per order plus \$0.10 per unit ordered. Obviously as the number of orders changes the total of the \$20’s will change over the year. With regard to the \$0.10 per unit order, the cost of the individual order will indeed change with the number of units ordered. However, over the year we will still order the same number of units in total, and so over the year, the number of \$0.10’s will stay fixed.

So……although there is unlikely to be a variable order cost in the exam, we would still only consider the fixed cost per order in the formula and when dealing with discounts.

I hope that makes sense

11. says

Hi Mr John Moffat

Thank you for your lectures, they are helping me understand the subject better alongside Kaplan text books. Could you please help? I have done the order level at 10000 and am getting a different result to you?

40000/10000 x 4 x 20 = 80
10000/2 = 5000 x 2.4625 = 12312.50 + 80 = 12392.50
40000 x 98.5 x 25 = 98500 000 + 12392.50 = \$98 512 393

I am not sure where my mistake is?

Kindest regards

• says

985000 + 12393.5 does not equally 98512393!! It is equal to 997393.5

(By the way, the answers to all of the examples are at the back of the Course Notes – see the contents page!)

• says

i think the mistake is on 40000x 98.5x 25 which should be 40000x 98.5%x 25.
hope you see the point 98.5 is a percentage

12. says

Is opentuition lectures and notes adequate enough to pass f2? I am self studying and my work schedule may not be so flexible to facilitate other tuition providers.

13. says

Hi Sir, I am currently using this lecture for paper F9. My question is that there are two remaining lectures for paper F2 which are for EBQ Example 4&5 and Re-order Level. Do the last two lectures apply for paper F9 as well? Because in the course notes for F9, it stops at example 3 and then last page has something about just in time system and that’s about it for that chapter.

• says

No (or Yes )

Paper F9 only tests on the EOQ formula – it does not test on the EBQ formula or on reorder levels.

• says

Why you put “yes” in brackets then? :p

• says

No, they are not in F9. Yes, what you say is correct.

14. says

hi, i am new here. tell me please what text book do you use for your lecture, thanks.

• says

Hi, I am unable to view this clip online, it says page not found. Any help?

Thanks.

• says

The lecture is working fine. Best if you look at the support page – it must be a problem specific to your device.

15. says

I have understood that if the holding cost per unit is fixed, it will not be affected by the discount while calculating the total annual holding cost. But, in the BPP Practise & Revision Kit, there is the exercise below (Answers Bank 6.19 page 128)

“A company uses an item of inventory as follows.
Purchase price \$25 per unit
Annual demand 1,800 units
Ordering cost \$32
Annual holding cost \$4.50 per unit
EOQ 160 units
What is the minimum total cost assuming a discount of 2% given on orders of 300 and over?
A \$45,720.00
B \$44,953.50
C \$45,000.00
D \$44,967.00″

I got \$44,967.00 and chose D.

But they chose B. They applied the discount in the total holding cost computation. Below are the details:

“With a discount of 2% and an order quantity of 300 units, unit costs are as follows.
Purchases \$45,000 × 98% 44,100.00
Holding costs (W1) 661.50
Ordering costs (W2) 192.00
Total annual costs 44,953.50
Workings:
(1) Holding costs = average inventory × holding cost for one unit of inventory for one year
Average inventory = order quantity ÷ 2 = 300 ÷ 2 = 150 units
Holding cost for one unit of inventory for one year = \$4.50 × 98% = \$4.41
=> holding costs = 150 units × \$4.41 = \$661.50
(2) Ordering costs = number of orders × ordering costs per order (\$32)
Number of orders = Annual demand ÷ order quantity = 1,800 ÷ 300 = 6 orders
=> ordering cost = 6 orders × \$32 = \$192″

• says

You only assume that the holding cost per unit changes with the cost per unit is you are specifically told that is the case. Otherwise you assume that the holding cost per unit stays constant.

• says

Thank you very much!

16. says

i understand that the TOTAL cost per ANNUM is cheaper at 5,000 units, however when i first did it i chose 10,000 units because the cost per unit is cheaper at that amount…… at 10,000 its 99.73 while at 5,000 its 199.27.

• says

You are dividing by the wrong number of units! You should have divided the total cost p.a. by the total units per year. Over the year we are buying the same number of units in all cases.

• says

sigh…cant believe i made that error!!

• says

I am having trouble answering this question can some kindly show me the calculation for this:

A company uses uses item of inventory as follows.
purchase price 25
annual demand 1800
ordering cost 32
annual holding costs 4.50
EOQ 160

what is the minimum total costs assuming a discount of 2% given on orders of 300 and over?