Inventory Management – Quantity discounts – ACCA Financial Management (FM)
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Hi John,
with this example, I understand that it is more profitable to order 5000units instead of 800units (from previous working) due to the 1% discount offered. However, in real life, other factors such as increased in insurance cost, theft, goods going bad etc. may set in because we purchased way too much compared to what we actually need. Please, what do you make of my point?
when i multiply 2.475 by 2500, i get 61,875
why did you multiply 2.475 by 250? am confused on that point
Hi, the holding cost is 2,500 *(10%*99%* $25) = 2,500 *2.475 =$6,187.5 rounded to $6,188
With this example, I understand that is it more profitable to order 5000units instead of 800units (from previous working) due to the 1% discount offered. However, ?? ???? ???? other factors such as increased in insurance cost, theft, goods going bad etc. may set in because we purchased way too much compared to what we actually need. Please, what do you make of my argument?
Thanks for you support overall Instructor, Wish I learn more about ACCA for my Skill.
Hello Sir,
I’m a little confused on the difference between inventory costs and total annual inventory costs. So according to what you’ve taught, inventory costs =Reorder cost +holding cost. Then total annual inventory costs = Reorder cost+holding cost+purchase cost.
Is that correct ?
That is correct 🙂
For the 10%, if we are reducing this due to the discount should it not be 9%. Where did the 99% come from unless you were using a 100%?
10% is the interest cost.
If there is a discount of 1%, then the cost per unit is only 99% of the original cost. (%’s are always based on 100)
Love the example very clear and to the point. Quick question, This method does not account for opportunity cost and seasonal factors does that mean its not practical to use EOQ in real life ? Is there a method that account for opportunity cost and seasonal factors ?
I do not have the BPP Study Text (only the Revision Kit) and so I cannot comment on what is in their text.
The holding cost of the money spent is based on the net cost of the goods (after any discount) and is therefore as shown in my lectures.
Thank you sir! Another informative lecture.
Thank you for your comment 🙂
Good day sir 🙂 Thanks for the lecture.
Do you mind explaining why would we include the discount in the holding cost? I thought there should be 2 different parties who supply us the inventory and hold the inventory?
Do we assume the supplier hold the inventory for us?
As I do explain in the lecture, the holding cost is the interest cost of the money spent buying the goods. The discount from the supplier reduces the net cost of the goods and therefore reduced the interest cost.
Thanks for the explanation but in the BPP text book it doesn’t reduce the discount % when calculating holding cost. its really confuse me which one method should I follow!