COST ELEMENTS

QUESTION 1

a) A company uses 15,000 units of stock item 6786 each year. The item has a purchase cost of $4 per unit. The cost of placing an order for re-supply is $220. The annual holding cost of one unit of the item is 10% of its purchase cost.

REQUIRED:-

i) What is the economic order quantity for item 6786, to the nearest unit?

ii) What would be the effect of an increase in the annual holding cost per unit on

(1) the EOQ and

(2) total annual ordering costs?

b) Data relating to stores item 6787 are as follows.

Daily use: 300 units

Lead time for re-supply: 5 - 20 days

Reorder quantity: 10,000 units

REQUIRED:-

What should be the reorder level for this stock item, to avoid the possibility of inventory-outs?

QUESTION 2

ABC has recently established a new unit in Newtown City. Its planning for the first year of operation depicts the following:

(i) Cash sales for the year600,000 units

(ii) Credit sales for the year1,200,000 units

(iii) Ending inventory Equivalent to 15 days sales

(iv) Number of working days in the year 300days

(v) Expected purchase price $ 450 per unit

(vi) Manufacturer offers 2% discount on purchase of 500 units or more as bulk quantity discount. The company intends to avail this discount.

(vii) Carrying costs include:

Financial cost of investment in inventory @ 16% per annum.

Rent of $ 10,000 per month.

(viii) Ordering costs are $ 300 per order.

REQUIRED:-

Compute the Economic Order Quantity (EOQ) and the estimated carrying costs and ordering costs for the first year of operation.