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hello Tutor.
I hope you are well, had a quick question, why the holding cost is reduced by the discount rate.
let’s say the 3% discount rate on purchase price above 500 units & when required to calculate EOQ, the discount is applied to purchase price, which makes sense, But if the holding price is 15% of the purchase price then how the discount rate applies to holding cost, is it, not that the holding price remains same as original value, even if the discount is given on purchase price. holding price should be constant if the discount is received or not, But this is not the case, or if it’s just I’m not making any sense.Why should the holding cost stay constant??
If the holding cost is given as a % of the purchase price, then if the purchase price is lower (because of a discount) then the holding cost is automatically lower as well.
This makes perfect sense because (as I explain in my free lectures) the most important holding cost is the interest cost of the money tied up in inventory. If the cost of the inventory is lower then the amount of money tied up (and therefore the interest cost) is lower as well.
I do suggest that you watch my lectures. They are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
Thank you very much, John, now it makes perfect sense when you said the interest in holding the inventory, my initial guess was logistic storage price & my question was based on those assumptions. Surely will go through your lecture again, Thank you.
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