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John Moffat.
John Moffat.-
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mjibola
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Hello John,
I’m trying to really understand the concept of inventory cost in Working Capital Management. Based on your lectures, you explained It’s irrelevant to consider the purchase price.
What’s important is the reorder cost and holding cost unless we’re specifically asked or if we’re considering quantity discounts.
But questions in the revision kit and study text in BPP consider the purchase price as part of the inventory cost when quantity discounts are NOT being considered and even when the question didn’t specify it. Shouldn’t this be wrong?
Would I get incomplete marks for not multiplying the Purchase price per unit by the annual demand?
John Moffat
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Unless there are discounts involved, then the total purchase price over the year will stay the same whatever the order quantity.
It is therefore irrelevant for the EOQ formula (except for sometimes calculating the holding cost) and it doesn’t matter whether you include it in the total annual costs (unless the questions specifically asks for them to be included).
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