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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › ANNUAL HOLDING COST
Hi,
Can you give me some advice on the following?
QUESTION : A company uses an items of inventory as follows :
Purchase price: $ 25 per unit
Annual demand : 1800 units
Ordering cost : $ 32
Annual holding cost : $ 4.5 per unit
EOQ: 160 units
What is the minimum total cost assuming a discount of 2% given on orders of 300 and over? ( This is the question 6.19 from BPP revision kit)
My answer is :
TC= OC+ HC + Cost of inventory
=D/Q * Co + Q/2 * Ch + D* purchase price
= 1800/300 * 32 + 300/2 * 4.5 + 1800 * 25 *0.98 = 44,967$
But their answer is 44,953.5 because there is a little different with my answer. They change total holding cost at a discount 2% . I don’t know why? In the comment lecture you said ” It depends how the holding cost is given. If it is given as a $ amount per unit (e.g. holding cost is $2 per unit), then it stays at that amount even if there is a discount on the purchase price.
If the holding cost is given as a % of the purchase price, then as the discount reduces the purchase price it also reduces the holding cost. ”
Please explain it for me.
Many thanks,
Thao Huyen
BPP should not have changed the holding cost – it should stay at $4.50 per unit.
It is one of the errors in the BPP Revision Kit. Your answer is correct.
Thank you very much 🙂
You are welcome 🙂
