- This topic has 3 replies, 3 voices, and was last updated 2 years ago by
.
- Posts
sir, I was going through an example i will paste here
A company uses components at the rate of 500 units per month, which
are bought in at a cost of $1.20 each from the supplier. It costs $20 each
time to place an order, regardless of the quantity ordered.
The supplier offers a 5% discount on the purchase price for order
quantities of 2,000 items or more. The current EOQ is 1,000 units.
The total holding cost is 20% per annum of the value of inventory held.
Required: Should the discount be accepted?
Solution
Order quantity = $1,000 $2,000
Order cost
(6,000/1,000 × $20)=120 (6,000/2,000 × $20) =60Holding cost
(20% × $1.20 × 1,000/2)=120 ($0.24 × 0.95 × 2,000/2) =228Purchase cost(6,000 × $1.20)=7,200 (6,000 × $1.20 × 0.95) =6,840
Total annual costs 7,440 7,128
The discount should be accepted because it saves the company $312
($7,440 – $7,128)sir, I don’t understand why they have taken (.95) while units are 2000 in the holding cost
is the solution correct this is an example from Kaplan book
Although I do not have the Kaplan book (I only have the BPP Revision Kit).
However the answer is correct.
The holding cost is 20% of the purchase price, and so if the purchase price is 5% lower because of the discount then the holding cost will be 95% lower as well.
I do explain this (and explain the reasons) in my free lectures on this.
The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
In the example that the person was asking about, why is the holding cost reduced by 5%? The amount being hold over the year shouldn’t go down, unless I’m missing something.
Edit: No worries. I’ve already worked it out.
- The topic ‘discount amount’ is closed to new replies.