Bulk Discounts

It depends how you are given the holding cost. If you are given it as a figure (for example, $2 per unit per annum), then you assume it does not change. (Effectively we are assuming that the $2 is the cost of storage space, heating, or whatever, and there is no reason that those costs should change just because the supplier gives a discount)

On the other hand, if you are given the holding cost as a % (for example, 5% of purchase price per annum), then it will change – if the purchase price is lower because of a discount, then the holding cost will automatically be lower as well.

(The logic here is that in real-life, one of the most important costs is the cost of the money tied up in inventory – the more we are spending on inventory, the more we are losing potential interest (or having to pay interest because we are having to borrow). If the supplier gives a discount, then we have less cash tied up in inventory and therefore less holding cost.)

I do not have the BPP text, but someone asked about it before and I think that BPP do have one example where even though the holding cost is given in $’s (e.g. $2 per unit per annum), they have then reduced that amount when there was a discount. For the exam this is wrong – unless you are given it as a % of cost (or unless the question specifically says that it will reduce because of the discount – which is unlikely) then you should assume that it does not change.

I do hope that all makes sense 🙂