2 Management Accounting 3 (M1) August Special Examination 2014 Question 3 Advanced stock control (25 marks; 45 minutes) Part A Skye Ltd purchases oil drums from a supplier for R100 per drum and sell them off at R150 per drum. Average monthly sales are 2000 drums, but this can deviate according to the following pattern: Sales per month Probability 1000 0.10 1500 0.20 2000 0.40 2500 0.20 3000 0.10 If there are insufficient drums in stock to meet sales orders, it is expected that on average 30 % of the customers will go elsewhere, while 70% will wait until stock is available. The lead-time to receive drums from the supplier is one month and Skye Ltd has determined that its optimum order quantity is 2000 drums, and holding costs are estimated to be R2 per drum per month. Required: Determine the optimum level of safety stock that should be carried. (11 Marks) Part B The Deodata Company estimates that it needs 49 000 boxes per year to pack its products. Each box costs R16,00 and the carrying cost is estimated to be 25% of the average inventory cost. The cost to place an order is R 20,00 Required 3.1 3.2 3.3 Calculate the economic order quantity (EOQ) Calculate the frequency (in days) with which orders should be placed, assume a 350 day business year. What is the annual savings if the company wants to change from an order size of 400 to the EOQ? List the key elements of a just-in-time inventory system. (14 marks) 3.4. 2 Management Accounting 3 (M1) August Special Examination 2014 Question 3 Advanced stock control (25 marks; 45 minutes) Part A Skye Ltd purchases oil drums from a supplier for R100 per drum and sell them off at R150 per drum. Average monthly sales are 2000 drums, but this can deviate according to the following pattern: Sales per month Probability 1000 0.10 1500 0.20 2000 0.40 2500 0.20 3000 0.10 If there are insufficient drums in stock to meet sales orders, it is expected that on average 30 % of the customers will go elsewhere, while 70% will wait until stock is available. The lead-time to receive drums from the supplier is one month and Skye Ltd has determined that its optimum order quantity is 2000 drums, and holding costs are estimated to be R2 per drum per month. Required: Determine the optimum level of safety stock that should be carried. (11 Marks) Part B The Deodata Company estimates that it needs 49 000 boxes per year to pack its products. Each box costs R16,00 and the carrying cost is estimated to be 25% of the average inventory cost. The cost to place an order is R 20,00 Required 3.1 3.2 3.3 Calculate the economic order quantity (EOQ) Calculate the frequency (in days) with which orders should be placed, assume a 350 day business year. What is the annual savings if the company wants to change from an order size of 400 to the EOQ? List the key elements of a just-in-time inventory system. (14 marks) 3.4