A large local government authority places orders for various stationery items at quarterly intervals. In respect of an item of stock, data are as follows:
Annual usage 5000 boxes
Minimum order quantity 500 boxes
Cost per box Rs. 2
Usage of material is on a regular basis and on average, half of the amount purchased is held in inventory. The cost of storage is considered to be 25% of the inventory value. The average cost of placing an order is estimated at Rs. 1.25.
The chief executive of the authority has asked you to review the present situation and to consider possible way of effective cost savings. You are required to:
(a) Tabulate the cost of storage and ordering for each level of orders from four to twelve placed per year.
(b) Ascertain from the tabulation the number of orders which should be placed in year to minimise these costs.
(c) Calculate the percentage savings on the annual cost which could be made by using the economic order quantity system.