FixIt Ltd Ltd. manufactures leather accessories in Narok County. Manufacturing ladies handbags requires special hides from Aphine goats of which it uses 2000,000 Kilos per annum. The company is proposing changes in its material procurement procedures to optimize on its profitability.

Details of current and proposed ordering and carrying costs are given below:

Current

Proposed

Ordering cost per order

Sh. 50,000

Sh.12,500

Purchase cost per Kilo

Sh.125

Sh.125

Inventory holding cost (as a % of the purchase cost)

20%

20%

To implement new arrangements will require one-off reorganization costs estimated at Sh140,000 which will be treated as revenue item for tax purposes. The rate of corporation tax is 30% and FixIt Ltd can obtain finance at an effective cost of 12%. The life span of the new system is 8 years.

Required:

i.The economic order quantity with current and proposed arrangements. (2 marks)

ii.Using NPV criteria determine whether the new proposal is worthwhile (4 marks)