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
• cost per box $2

Usage of material is on a regular basis and on average, half of the amount purchased is 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 $12.50.

The chief executive of the authority has asked you to review the present situation and to consider possible ways of effecting cost savings.

Required

• Tabulate the costs of storage and ordering item A32 for each level of ordersfrom four to twelve placed per year; (16 marks)
• Ascertain from the tabulation the number of orders which should be placed in ayear to minimize these costs; (1 mark)
• Produce a formula to calculate the order level which would minimize thesecosts.Your answer should explain each constituent part of the formula and their relationships; (2 marks)
• Give an example of the use of the formula to confirm the calculation in (b) above; (2 marks)
• Calculate the percentage saving on the annual cost which could be made by using the economic order quantity system; (2 marks)
• Suggest two other approaches which could be introduced in order to reduce the present cost of storage and ordering of stationery. (2 marks)   .                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
•