hello sir..these lectures are very helpful as i am sitting for my exam on 7 December. i have a question. In the bpp book it talks about minimum quantity , maximum quantity, lead time..buffer…its not part of the lecture and i’m worried it will be in the exam as i dont understand it

If you mean the lecture, then no – lectures cannot be downloaded. They can only be watched online. It is the only way that we can keep this website free of charge.

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!

Hi Mr John,
Can you give me some advice on the following?
QUESTION : A company uses an items of inventory as follows :
Purchase price: $ 25 per unit
Annual demand : 1800 units
Ordering cost : $ 32
Annual holding cost : $ 4.5 per unit
EOQ: 160 units
What is the minimum total cost assuming a discount of 2% given on orders of 300 and over? ( This is the question 6.19 from BPP revision kit)

My answer is :
TC= OC+ HC + Cost of inventory
=D/Q * Co + Q/2 * Ch + D* purchase price
= 1800/300 * 32 + 300/2 * 4.5 + 1800 * 25 *0.98 = 44,967$
But their answer is 44,953.5 because there is a little different with my answer. They change total holding cost at a discount 2% . I don’t know why? In the comment lecture you said ” 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. ”

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?

For reorder cost there are 80 orders during the year and so the total cost is 80 x the cost for each oder.

For the holding cost, the average level of inventory throughout the year is half of the quantity ordered each time, so we are multiplying this by the cost of holding one unit for a year. (We are not calculating it for one order).

I do suggest that you watch the first lecture on inventory control again, where I explain this.

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?

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.

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?

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).

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.

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

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…

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.

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.

salman says

tz is just awesome?

John Moffat says

Thank you

simran says

hello sir..these lectures are very helpful as i am sitting for my exam on 7 December. i have a question. In the bpp book it talks about minimum quantity , maximum quantity, lead time..buffer…its not part of the lecture and i’m worried it will be in the exam as i dont understand it

John Moffat says

They are less important, but are covered in the F2 Revision Lectures.

simran says

thank you so much

so are they likely to come in the exams?

John Moffat says

Possibly, but not as likely as EOQ calculations.

simran says

okay.. thank you so much sir

John Moffat says

You are welcome

kazilala says

Ive been trying to download the Audiobook without success.Is there another way I could download it online?

John Moffat says

If you mean the lecture, then no – lectures cannot be downloaded. They can only be watched online. It is the only way that we can keep this website free of charge.

kazilala says

No theres an option on the page advertising the use of an Audiobook

John Moffat says

I can only imagine that it was an advert.

We do not offer OpenTuition audiobooks.

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

aliimranacca007 says

Sir you told that discount also effect on holding cost but bpp kit Q 29 zps co discount only effect on purchase cost ..

John Moffat says

If you are certain that is the case (because I do not have the BPP book) then they have made a mistake.

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)

HUYEN says

Hi Mr John,

Can you give me some advice on the following?

QUESTION : A company uses an items of inventory as follows :

Purchase price: $ 25 per unit

Annual demand : 1800 units

Ordering cost : $ 32

Annual holding cost : $ 4.5 per unit

EOQ: 160 units

What is the minimum total cost assuming a discount of 2% given on orders of 300 and over? ( This is the question 6.19 from BPP revision kit)

My answer is :

TC= OC+ HC + Cost of inventory

=D/Q * Co + Q/2 * Ch + D* purchase price

= 1800/300 * 32 + 300/2 * 4.5 + 1800 * 25 *0.98 = 44,967$

But their answer is 44,953.5 because there is a little different with my answer. They change total holding cost at a discount 2% . I don’t know why? In the comment lecture you said ” 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. ”

Please explain it for me.

Many thanks,

Thao Huyen

John Moffat says

Please ask in the F2 Ask the Tutor Forum – not as a comment on a lecture.

HUYEN says

Yes,I’ll learn from experience for next time , thank for your answering in the F2 Ask the Tutor forum.

John Moffat says

No problem

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.

kelechi says

Hello, why do we calculate reorder cost for 80 orders as in this example 1, but calculate holding cost for only 1 order. Thanks.

John Moffat says

We are calculating the total cost over a year.

For reorder cost there are 80 orders during the year and so the total cost is 80 x the cost for each oder.

For the holding cost, the average level of inventory throughout the year is half of the quantity ordered each time, so we are multiplying this by the cost of holding one unit for a year. (We are not calculating it for one order).

I do suggest that you watch the first lecture on inventory control again, where I explain this.

philip 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?

John Moffat 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.

adarsh 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 :/

John Moffat says

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

adarsh says

Okay thankyou sir

arman90fy 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?

John Moffat 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).

arman90fy says

got it, thank you sir……:)

jefzen2610 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

jefzen2610 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

fahim231 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.

John Moffat 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

fahim231 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

cona700 says

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

karam 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.

John Moffat 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.

Munazza says

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

John Moffat 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.

Munazza says

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

Thanks alot.