What is the impact of bulk buys on purchase cost and holding cost?

Bulk buying generally leads to a decrease in purchase costs due to economies of scale. When purchasing larger quantities of materials, suppliers often offer discounts and lower prices per unit, making it more cost-effective to buy in bulk. This reduction in purchase cost can significantly benefit a company’s overall expenditure.

However, holding costs are likely to increase with bulk purchases. Holding costs, which include storage, insurance, deterioration, and obsolescence, go up because more inventory must be stored. A larger volume of goods means that more warehouse space is needed, and the associated costs may rise.

Thus, while bulk buying decreases purchase costs through lower unit prices, it typically results in an increase in holding costs due to the greater volume of inventory that needs to be managed. This relationship highlights the trade-off between obtaining lower purchase prices and managing the associated increase in inventory carrying costs.