Kain Nusantara Company sells imported fabrics from Indonesia. The supply of fabrics will be delivered by ship through Pasir Gudang Port. The company expects the annual demand is 21,600 rolls of fabric. The cost information related to the order and management of fabric inventories are as follows:

1. Company records show that the order processing cost is RM4 per order. However, starting from early this year, the cost of processing has increased by 10 per cent.

2. Each order will be checked by a customs officer. The fee charged is RM32. This order will be accepted and reviewed by a clerk at the Receiving Department. This receiving activity requires 4 hours for each order received. This clerk has no other duties, and his salary is RM22 per hour. Other variable overhead costs for the Receiving Department will be applied at RM4 per hour.

3. Warehouse cost is RM3.25 per roll of fabric.

4. The insurance cost of inventory is RM1.25 per roll of fabric.

5. Damage costs are estimated at an average of RM2.50 per roll of fabric.

6. Other holding costs are RM3 per roll of cloth.

Kain Nusantara Company operates 365 days a year. Cycle period from the date the order is made from the supplier until the accepted fabrics is 14 days.

Required:

a) Calculate the ordering cost and holding cost for Kain Nusantara Company

b) Calculate the Economic Order Quantity (EOQ) and the total annual inventory cost based on the EOQ.

c) Calculate the reorder point.

d) Explain the philosophy of Just-in-Time (JIT) and discuss the important characteristics needed to ensure the successful implementation of JIT policy in managing inventory.

2

QUESTION 2

An electronic repair shop using 18,000 units of spare parts per annum (average 50 units for every working day). Cost of making purchase order is RM20 per order. This shop usually will order 200 units in each order. Inventory storage cost is RM4 per unit per year.

Required:

Calculate

(a) Total ordering cost per year

(b) Total storage cost per year

(c) Total inventory cost per year

(d) Economic order quantity

(e) Total inventory cost per year based on the Economic Order Quantity Model

(f) Cost saved per year from the using of Economic Order Quantity Model compared to the order size of 200 units

(g) Re-order point with the assumption that order waiting time is three days

(h) Safety stock and reorder point if the using of spare part increase to 55 units per day.