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Purchase price $25 per unit
Annual demand 1,800 units
ordering cost $32
Annual demand cost $4.50
EOQ 160 unitsWhat is the minimum total cost assuming a discount of 2% given on orders of 300 and above?
-In the BPP book, the calculation of holding cost is as follows:
Holding cost= 300/2 x ($4.50 x 98%)=$661.50My question is that why $4.50 is multiplied by the discount, that is, 98%?
They should not have multiplied by 98%.
If the holding cost is given in $’s then you assume it stays fixed (at $4.50 in this case). If the holding cost is given as a % of purchase cost, then if the purchase cost falls (because of discount) then the holding cost will also fall.
Thanks for the reply sir.
In the BPP book, the workings are as follows:
Holding cost= 300/2 x ($4.50 x 98%)=$661.50
Ordering cost=1800/300 x $32=$192
Purchases cost= 1800 x 25 x 98%=44,100Therefore, the total cost is adding these three together which is =$44,953.50.
Is this the correct way of doing it?
No – I wrote in my previous reply that they should not have multiplied the holding cost by 98% !!
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