1. avatar 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

  2. avatar 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.

  3. avatar 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
    (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″

    Please help. I am confused.

  4. Avatar of nari 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.

  5. avatar says

    Wait a minute!! did he just say the best level is 5,000 each time (at the end of the video)??? I thought it just have to be 10,000 units each time (as proved from the calculations, it offers optimal cost). Great lecture it is.

    • Avatar of johnmoffat says

      Yes – that is what I did say, because the answer is 5,000!

      Check again (or look at the answer at the back of our Course Notes). The total cost at 5000 is lower than the total cost at 10000 :-)

  6. avatar says

    if the holding cost is a fixed cost of say $2,50 per unit and not a percentage of the purchase cost as in this example should the discount still be applied to the fixed holding cost?

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