a) Aero Dynamics Corporation manufactures certain electronic products for the aviation industry. In 2018, the companys management was reviewing the inventory policy for YM-10, one of the electronic chips used in the production process. The chip is procured in small cans for 100 each can. The firm uses 4,800 cans per year. An activity cost analysis revealed that placing an order entails significant administrative costs. These costs include cost of raising purchase requisition of 10 per order; getting a quote from three suppliers costing 15, placing an order costing 5, inspecting and recording an incoming order against specifications on purchase order costing 20. The driver for all these costs was believed to be number of orders. In addition, shipping cost for each order of YM10 borne by Aero Dynamics was 100 per order. The current applicable interest rate on financing inventory is 3%. The only other relevant holding cost was believed to be insurance cost of 1% per year. [CONTINUED] BE131-6-AU /4 Juliet Turner, the financial controller of Aero Dynamics decided to dig deeper into the costs. Her analysis revealed that the chips needed to be stored at a particular temperature, otherwise there was a risk of the chip becoming useless. The cost of energy required for keeping the chips in a workable condition and chips lost during storage entailed significant costs that were never taken into account before. Ms Turner believed that these costs could be as high as 15.20 per can per year. Ms Turner then decided to pre-select a vendor for supply of chips and installed an automated ordering and data recording system. As a result of these measures, there was a significant reduction or elimination in ordering costs. For example, shipping costs were passed on to the supplier. Other activities related to ordering, for example, getting quotes from suppliers, placing an order, inspecting and recording an incoming order, were either completely eliminated or were significantly reduced. As per a careful estimate, the cost of placing an order for YM-10 was now brought down to as low as 20.

b) After the analysis and changes made by Ms Turner i) Compute the new EOQ. (10 marks)