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WP Wagtail Ltd uses the optimal batch size' model (see below) to determine optimal levels of raw materials. Material B is consumed at a steady, known rate over the company's planning horizon of one year; the current usage is 4000 units per annum. The costs of ordering B are invariant with respect to order size; clerical costs of ordering have been calculated at $30 per order. Each order is checked by an employee engaged in using Bin production who earns $8 per hour irrespective of his output. The employee generates a contribution of $1 per hour when not involve in material checks and the stock check takes five hours. Holding costs amount to $15 per unit per annum. The supplier of material B has very recently offered Wagtail Ltd a quantity discount of $0.24 a unit on the current price of $24, for all orders of 400 or more units. a.explain how uncertainties in materials usage and lead time may be incorporated into the analysis. Expert Answer Was this answer helpful? 31 Anonymous answered this 94 answers ANSWER The hourly opportunity cost of checking an order is $9 ($8 labour cost plus $1 contribution). The employees are paid irrespective of output or the activities on which they are engaged, and opportunity cost is thus represented by lost cash inflows before the labour cost is deducted. The relevant ordering cost for the EOQ model is therefore $75 [$30 + ($9 x 5)]. EOQ = V (2x $75 x 4000 / $15 = 200 units The savings available if the firm purchases in batches of 400 units are: () Saving in purchase price (4000 x $0.24) 960 Saving in ordering cost {[(4000/200) (4000/400)] x $75) 750 Total savings 1710 The additional holding cost if the larger order is purchased is: [(400 - 200)/2] x $15 = $1500 The savings exceed the additional costs by $210. Therefore the company should accept the discount. Comment >