Does the Bulk discount affect the Holding costs? Why?

Hi Victor

It depends on the information in the question.

If you are given the holding cost as an absolute amount (e.g. $2 per unit per year) then the volume discount will not affect it. (We will be assuming that it relates to costs such as rent and heating etc., and there is no reason why a discount on the purchase price would affect those costs.).

On the other hand, if you are given the cost as a % (e.g. holding cost is 5% per annum of purchase price) then it will change because of a discount (if the purchase price is lower then 5% of purchase price will be lower as well).
The logic here is that an important cost of holding inventory is the interest cost on the money tied up in inventory. The more money tied up in inventory the more interest we are losing because we have less cash (or the more interest we are paying because we are needing to borrow money to pay for it). So, if we pay less for the inventory, then there is less interest cost.

I hope that makes sense, and answers your question 🙂

You are very welcome 🙂