The following information relates to the actual sales of Griffton Ltd during the last four months of its financial year.

\begin{tabular}{lcccr}

& March & April & May & June \\

Quantity (units) & 900 & 900 & 900 & 1,000 \\

Price each & $£ 55$ & $£ 55$ & $£ 55$ & $£ 55$

\end{tabular}

The budgeted information below relates to the next financial year commencing 1 July 2014:

(i) The company forecasts that sales quantity will decrease in July by $10 \%$ of the level in June. The reduced quantity will remain for August and September, but will then increase by $10 \%$ in October, and remain fixed for the next three months.

The sales price will remain at $f 55$ each until 1 September when it will be increased to $£ 60$ per unit, this price will be effective for a minimum of six months.
$50 \%$ of sales are on a cash basis and attract a $2 \%$ cash discount, the remaining $50 \%$ of sales are paid two months in arrears.
The company arranges its purchases of raw materials such that the closing inventory at the end of each month exactly meets the requirement for the following month's sales. Each unit sold requires $2 \mathrm{~kg}$ of material at $£ 15$ per $\mathrm{kg}$; this price is fixed until December 2015.
(ii) As a separate exercise, the managing director asks for inventory levels to be reviewed, and asks you about the use of economic order quantities at some time in 2015. The following budgeted data would apply to this exercise:
Material Price Inventory holding costs Ordering costs $2,000 \mathrm{~kg}$ per month $£ 15$ per kg $20 \%$ p.a. on average inventory value $£ 10$ per order Required:
A. Draw up monthly budgets for the four-month period commencing 1 July 2014 for:

(a) Accounts receivable in $\mathrm{fs}$;

(b) Raw material purchases in $\mathrm{kg}$.
B. From the budgeted information given in note (ii) calculate the economic order quantity for the company. Briefly outline the limitations of this ordering method.
(Reproduced with the kind permission of OCR - University of Oxford Delegacy of Local Examinations: GCE A-level)
Authors' note: EOQ was covered in Section38.8

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