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

Thank you so much. Apologies for the mistake! 🙂 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.

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.

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.

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.

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%)

alll says

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?

John Moffat says

No it can’t be cheaper. Look again at the graphs 🙂

SimplyDammy says

Thank for the lectures… It is well explanatory

John Moffat says

Thank you for your comment 🙂

2568840764zZ says

How do you get the optimal solution with a discount?

John Moffat says

I explain in this lecture working through example 3 from our free lectures notes!!

tuathanach says

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

John Moffat says

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.

tuathanach says

Thank you so much. Apologies for the mistake! 🙂 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

ashuutosh says

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….

John Moffat says

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.

kosiso355 says

we can still say (2.50 – 1%) = 2.475

John Moffat says

Yes, of course 🙂

guyver101 says

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

John Moffat says

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.

guyver101 says

Thanks John

Camille says

Hi sir, how did come by the 99%?

John Moffat says

The question says that there is a 1% discount, so the cost of only 99% of what it was.

ebilolu16 says

Sorry, I still do not understand. Can you explain further

John Moffat says

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%)