A large local government authority places orders for various stationery items at quarterly intervals. In respect of
Question:
A large local government authority places orders for various stationery items at quarterly intervals.
In respect of an item of stock coded A32, data are:
annual usage quantity 5000 boxes minimum order quantity 500 boxes costperbox £2 Usage of material is on a regular basis and on average, half of the amount purchased i,s 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 £12.5.
The chief executive of the authority has asked you to review the present situation and to consider possible ways of effecting cost savings.
You are required to:
(a) tabulate the costs of storage and ordering item A32 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 a year to minimize these costs;
(c) produce a formula to calculate the order level which would minimise these costs - your formula should explain each constituent part of the formula and their relationships;
(d) give an example of the use of the formula to confirm the calculation in
(b) above;
(e) calculate the percentage saving on the annual cost which could be made by using the economic order quantity system:
(f) suggest two other approaches which could be introduced in order to reduce the present cost of storage and ordering of stationery.
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