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Hi everyone,
I have a question on Bulk Discount & Holding Cost regarding Question 6.19 in BPP Practice & Revision Kit :
“A company uses an item of inventory as follows.
Purchase price $25 per unit
Annual demand 1,800 units
Ordering cost $32
Annual holding cost $4.50 per unit
EOQ 160 unitsWhat is the minimum total cost assuming a discount of 2% given on orders of 300 and over ?
A. $45,720.00
B. $44,953.50
C. $45,000.00
D. $44,967.00”The answer given in the Revision Kit is B but I think it should have been D
The answer implies that holding cost ALWAYS depends on purchase price (in this case, holding cost per unit when discount taken = $4.50 x 98%)
But I think that is not true because the question does NOT say anything about the relation between holding cost and purchase price and holding cost is a constant number so we can not assume that like what they did in the BPP Revision Kit.
How do you think about this ? Holding cost ALWAYS depends on purchase price or ONLY WHEN the question says so ?
maybe because annual holding cost is based on the inventory value, when a discount of 2% is given, then inventory value would be influenced, so is the holding cost.
@samh said:
maybe because annual holding cost is based on the inventory value, when a discount of 2% is given, then inventory value would be influenced, so is the holding cost.The question never says anything about this. Holding cost is a fixed price per annum in the question. Could we assume that it changes with purchase price ?
BPP are not correct in this question.
If the holding cost is given in $’s (as in this question) then you assume that it stays the same with or without discounts.
If the holding cost is given as a % of purchase price, then if the purchase price is lower (because of the discount) then the holding cost is also lower.
(Some holding costs are not affected by the purchase price e.g. the cost of the space used in the storeroom; other costs are affected by the purchase price e.g. the interest cost of money tied up in inventory. However, in the exam, the rule is what I have written above.)
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