Advanced : Calculation of EOQ and safety stocks assuming uncertainty The retailing division of Josefa pic sells Hofers and its budget for the coming year is given below·

The supplier of Hofers is responsible for their transportation and charges Josefa pic accordingly. Recently the supplier has offered to reduce the cost of transportation from £750 per order to £650 per order if Josefa pic will increase the order size from the present 600 units to a minimum of 1000 units.
The management of Josefa pic 1s concerned about the retailing division's stock ordering policy. At present, a buffer stock of 200 units is maintained and sales occur evenly throughout the year.
Josefa pic has contracted to buy 4200 Hofers and, irrespective of the order quantity, will pay for them in equal monthly instalments throughout the year. Transportation costs are to be paid at the beginning of the year The cost of capital of Josefa pic is 20% p.a .
Requirements:

(a) Determine the quantity of Hofers which Josefa pic should order, assuming the buffer stock level of 200 units is maintained, and calculate the improvement in net profit that will result. (11 marks)

(b) Calculate what the buffer stock level should be, assuming that:
(i) Josefa pic changes its ordering frequency to one order (of 700 units) every two months;
(ii) stockout costs are £18 per unit:
(iii) the distribution of sales within each two-month period is not even but the follow1ng two-monthly sales pattern can occur

(c) Discuss the problems which m1ght be experienced in attempting to maintain a stock control system based upon economic order quantities and buffer stocks Note: (1) Ignore taxation (2) The formula for EOO is

where x = opt1mal batch size, I= fixed costs per batch s = expected sales volume per annum, h = cost of holding a unit in stock for one year

Transcribed Image Text:

Sales (4200 units at 85 each) Cost of goods sold: Opening stock (200 units at 65 per unit) Purchases () () 357 000 13000 (4200 units at 750 per unit) 294 000 307 000 Closing stock (200 units at 70 per unit) 14000 293 000 Gross profit 64 000 Purchasing department cost Variable (7 orders at 300 per order) 2100 Fixed 8400