Inventory Control (part 2) Quantity Discounts – ACCA Management Accounting (MA)
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When we work with higher amount the holding cost increase faster compare with reordering cost. I have tried recently.
That is obviously true, but the total cost is bound to increase and that is what matters.
why shouldn’t we work out 6000,7000 etc in the case of bulk discount- perhaps it will be cheaper due to less ordering costs?
No it can’t be cheaper. Look again at the graphs 馃檪
When we work with higher amount the holding cost increase faster compare with reordering cost. I have tried recently.
Thank for the lectures… It is well explanatory
Thank you for your comment 馃檪
How do you get the optimal solution with a discount?
I explain in this lecture working through example 3 from our free lectures notes!!
Hi there.
Is there a mistake in example 3 when calculating the 10,000 + economic order quantity? My results are varying from what you get and I can’t see where I am going wrong. (I’m certain it is me, however!).
Reorder cost = (40,000/10,000) x $20 = $80
Holding costs = (10,000/2) x (98.5% x 25) = $123125
Purchases = 40,000 x (98.5% x 25) = $985,000
Total = $1108205.00
It is the holding cost that is wrong. The holding cost per unit is 10% of the cost, so 10% x 98.5% x $25 per unit.
Thank you so much. Apologies for the mistake! 馃檪 I also would just like to thank you for all your work. Truly unbelievable. I’ve since passed two ACCA exams thanks to Opentuition and you.
Best,
Scott
Hey!
Lectures are really good,I appreciate that…
But I’m thinking in what sense we are considering discounts on inventory holding costs. Basically discounts are provided by the retailer (from whom we are purchasing goods) and holding costs is something we are bearing on keeping the stuffs in warehouse…
(If I’m correct) what makes the discounts to be calculated and affected on inventory holding costs?
Goods will be same always,all fixed and variable costs in order to hold them will be same ,the effect we are talking is about discounts on ordering more goods at once….
As I do explain in the lecture, one of the main costs of holding inventory is the interest cost of the money tied up in the inventory. If there is a discount then the cost of the inventory is less and so the interest cost is less also.
we can still say (2.50 – 1%) = 2.475
Yes, of course 馃檪
Thanks for the lectures. Perhaps I’m over complicating this.
The inventory holding cost will include costs which are not impacted by the purchase cost (such as heating, lighting, space) and costs which are (insurance, opportunity cost due to capital being tied up).
So it doesnt seem to follow that a 1% discount on purchase price would relate to a 1% saving in inventory holding. To use an extreme, if they acquired 1000 desks for free, there would still be inventory holding costs associated.
Shouldn’t the calculation take this into account?
Thanks
Firstly any fixed costs of holding inventory (such as the space costs if it is a fixed size warehouse) are irrelevant to the decision because they will stay the same regardless of the order quantity each time.
As far as the variable costs are concerned, you are correct in saying that in practice not all of them will be impacted by changes in the purchase price.
However, as far as the exam is concerned, the holding cost is either given as a fixed amount per unit (in which case it will not change if there is a discount), or (more commonly in the exam) it is given as a % of the purchase price in which case we do assume that it changes.
Thanks John
Dear John, I am very grateful for these lectures, you are a brilliant tutor, clear and logical – thank you!
Just out of curiosity: in the MA (F2) exam the holding cost is given (or we calculate it from the EOQ formula). At which exam do we get to calculate holding cost, taking into account the fixed and variable elements? Surely we have to be able to calculate it in real life 馃檪
Both in exams and in real life the holding cost is the total of any storage costs (e.g. the rent of the space needed) together with the interest cost of the money tied up in inventory which is the purchase cost per unit multiplied by the interest rate.
Hi sir, how did come by the 99%?
The question says that there is a 1% discount, so the cost of only 99% of what it was.
Sorry, I still do not understand. Can you explain further
If we get a discount of 1% then it means that the cost is 1% less than it is at the moment. If the cost is 1% less then it is then 99% of what it is at the moment (100% – 1% = 99%)