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1. There’s a question on BPP Working Capital Pangli Co that says inventory increases by 52250. Wouldn’t that result in increase in finance cost and cause a cash outflow that increases overdraft. Why does the answer scheme not take account of this?
2. If the exam question states to calculate the change in cost of inventory but does not specify whether it’s inventory management or inventory financing, do we include both? (By inventory financing I mean the average inventory value held increases hence the finance needed increases)
1. I assume that you are referring to part (b) of the question. In which case it is paying for the purchases that will affect the overdraft at the end of the month, and the purchases will include buying the extra inventory.
2. If the question does not make it clear then you would include both 🙂
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There is a question on BPP called Dusty Co where they say holding cost excludes finance cost. Its very confusing because in part(iii) does the net savings in finance cost include the savings in annual purchase due to the discount AND the increase in interest due to holding more average inventory?
But we always include the finance cost in inventory control questions. More sensible would be to have included it as part of the holding cost (and the examiner has written in the answer that this was acceptable). Have you watched our free lectures on inventory control?
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Yes I’ve watched the lectures therefore I know finance cost is part of holding cost. Though I’m still confused on two parts.
1. Why do we not take current overdraft paid and divide it by average inv to get the finance cost per unit (250000*3% /62500) since it is current overdraft and this is our current position?2. Why will an decrease in annual purchase price in (iii) not cause a decrease in finance cost?
1. The question asks for the effect of changing the order quantity and so it is only the difference in the average inventory that will change the finance cost from what it currently is to what it will turn out to be.
2. They are not paying for all the purchases at once. The money tied up in the average inventory is what gives rise to the finance cost.
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