Due to the amount of damages and legal expenses faced by the company, the management team has asked you as the companys finance manager, how they can manage their cash flows more efficiently. After discussing the matter with Louise Bloom, you think there could be significant savings if the raw materials inventory and accounts payable were better managed.

Raw materials The main component of the raw materials inventory of Looking Good is lanolin. Being a natural product, lanolin has a shelf life of only 18 months before it has to be discarded. The company has made a large purchase of heavily discounted lanolin from a competitors liquidation 2 years ago. About one third of this purchase was discarded in the last 6 months and the company has had trouble getting the inventory right ever since then. A new and regular source of lanolin has been found, but the supplier is located interstate so shipments take 2 weeks to arrive after an order has been placed. This has meant that Looking Good often runs out of lanolin, which is critical to almost all their products. Management are reluctant to authorise large orders as they know that ordering too much will have an adverse financial consequence.

The line manager has estimated the usage of lanolin for the coming year as 1500 kilograms. The supplier will accept orders only in 50 kilogram lots at a price of $30/kg. The cost of placing the order is $75. Lanolin is quite bulky, so the carrying cost per kilogram is $2.50. To avoid running out of lanolin and holding up production, a safety stock of 100kg is to be maintained, even during the 2 week period it takes for a new order to be delivered.

Accounts payable A second supplier of lanolin has been identified and has agreed to supply Looking Good for the same costs. The only difference between the two suppliers is the credit terms they offer. The first offers terms of 1/45 net 90, while the second gives 2/15 net 60.

Required

1. a Calculate the optimal order quantity of lanolin.

2. b Identify the number of orders that will be placed each year.

3. c Determine when new inventory should be ordered.

4. d Calculate the average inventory level under the new policy.

5. e Prepare a report that explains the methodology you have used and discuss your results. f Recommend which supplier should be used.

[3 marks] [3 marks] [3 marks] [3 marks] [3 marks] [4 marks]

[Total for Part Two = 19 marks]

Part Two Due to the amount of damages and legal expenses faced by the company, the management team has asked you as the company's finance manager, how they can manage their cash flows more efficiently. After discussing the matter with Louise Bloom, you think there could be significant savings if the raw materials inventory and accounts payable were better managed. Raw materials The main component of the raw materials inventory of Looking Good is lanolin. Being a natural product, lanolin has a shelf life of only 18 months before it has to be discarded. The company has made a large purchase of heavily discounted lanolin from a competitor's liquidation 2 years ago. About one third of this purchase was discarded in the last 6 months and the company has had trouble getting the inventory right ever since then. A new and regular source of lanolin has been found, but the supplier is located interstate so shipments take 2 weeks to arrive after an order has been placed. This has meant that Looking Good often runs out of lanolin, which is critical to almost all their products. Management are reluctant to authorise large orders as they know that ordering too much will have an adverse financial consequence. The line manager has estimated the usage of lanolin for the coming year as 1500 kilograms. The supplier will accept orders only in 50 kilogram lots at a price of $30/kg. The cost of placing the order is $75. Lanolin is quite bulky, so the carrying cost per kilogram is $2.50. To avoid running out of lanolin and holding up production, a safety stock of 100kg is to be maintained, even during the 2 week period it takes for a new order to be delivered. Accounts payable A second supplier of lanolin has been identified and has agreed to supply Looking Good for the same costs. The only difference between the two suppliers is the credit terms they offer. The first offers terms of 1/45 net 90, while the second gives 2/15 net 60. Required a Calculate the optimal order quantity of lanolin. [3 marks] b Identify the number of orders that will be placed each year. [3 marks] Determine when new inventory should be ordered. [3 marks] d Calculate the average inventory level under the new policy. [3 marks)