Hi Sir
Just out of interest...why does the holding cost get cheaper if a discount is offered? Surely it is false economics to make the holding cost the same % of the discounted price if you had calculated previously at the non discounted price that holding costs were say 15% of the price of the unit. That is surely an absorption type price and the same figure should apply to the discounted price not as a percentage but as a number or a higher percentage
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EOQ
9y ago#1The main holding cost is the interest cost of the money tied up in inventory, and this is what is likely to be the case if the cost is given as a % of purchase price.
If the purchase price is lower, then there is less money tied up, and therefore less interest cost.
Thank you.
i was reading one text book from BPP which put the holding costs as things like warehousing etc
9y ago#3Yes - the holding cost could be things like the storage costs. In which case they would not be affected by any discount, but as a result would be stated as a fixed amount in $'s and not as a % of purchase price.
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