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ANNUAL HOLDING COST

HHUYEN10y ago
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
John MoffatJohn MoffatTutor10y ago#1
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.
HHUYEN10y ago#2
Thank you very much :)
John MoffatJohn MoffatTutor10y ago#3
You are welcome :-)
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