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In e.g 3 chapter 4, John multiplies the average inventory by the discount to calculate the holding costs at the discounted rate. In the BPP revision kit they dont do this. They only include the discount in the purchase cost? Can you explain the correct method to calculate please?
I do not multiple the average inventory by the discount!!!
I reduce the holding cost per unit by the amount of the discount.
If the holding cost is given in the question in $’s per unit, then the holding cost does not change as a result of the discount.
If, on the other hand, the question gives the holding cost as a % of purchase price (as is the case in my example) then if the purchase price per unit is lower (because to the discount) then the holding cost will be lower as well.
(There used to be one question in the BPP Revision Kit where the holding cost was given as a % of the purchase price, but the answer did not reduce it because of the discount – the answer was wrong. I don’t know whether or not the same question is still in the current edition of the Revision Kit or not.)
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