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Hi Sir,
It’s a bit of a silly question but I was looking at the September/December 2019 past paper and was slightly confused.
Q32 scenario 2
Been asked to calculate current holding and ordering cost and then asked about EOQ. I didn’t understand why they deducted the 0.5% bulk discount when calculating EOQ? I assumed that wasn’t even part of the question as the discount was part of the overdraft calculation.
How are you meant to calculate that on the calculator? So units is 1.5m
Ordering cost is £252
Holding cost is 0.21
And discount is 0.5%Thank you.
The answer has not subtracted the discount when calculating the EOQ.
In (a)(ii) they calculate the EOQ and use $0.21 as the holding cost.
In (a)(iii) There is no EOQ to calculate because if they want the discount then the order quantity has to be 250,000 units each time. When calculating the total inventory cost then again the answer uses $0.21 as the holding cost.
The relevance of the discount is that although the total inventory cost increases over the year, there is (separately) a saving because the total purchase cost is lower and an extra cost because of more overdraft interest.
Ohh yeah…silly me! I was tapping it wrong on the calculator that’s why I was get a different figure hence why I assumed it had something to do with the discount maybe.
Now I understand that the bulk discount would be a saving and the and the additional average units increase compared to old policy would lead to increase cost in holding and having more units ordered due to taking up the discount would lead to using the overdraft to purchase those.
It all makes sense now!
Thanks a lot sir!
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