- This topic has 1 reply, 2 voices, and was last updated 7 years ago by
.
- Posts
Purchase order- it said the total cost will remained the same. But what if prices fluctuation happens? Don’t think i understand this.
Perhaps you meant to post this to the Ask ACCA tutor forum?
If you are referring to the EOQ model, one of the assumptions (and limitations) is a constant purchase price per unit (i.e. no discounts).
If discounts apply the approach is “trial and error”:
1. Calculate EOQ, ignoring any possible discounts
2. If the EOQ falls within a discount band, recalculate it with an Ch adjusted (if Ch depends on the price paid for the items)
3. Calculate total annual costs (purchase costs + holding costs + order costs) at the EOQ
4. Calculate total annual costs of ordering just enough items to qualify for EACH discount band above the EOQ. (As it may be worth exceeding the EOQ if the discount received compensates for the extra holding costs that would be incurred as a result of ordering a larger quantity)
5. Select the order quantity which minimises total annual costs.It is highly unlikely that would be examined computationally in F2/FMA.
- You must be logged in to reply to this topic.