INVENTORY MANAGEMENT

Raffaelo Limited manufactures denim trousers from material purchased from an external supplier. The management of Raffaelo Limited has maintained an order quantity of 350 metres of denim material.

The accountant of the enterprise wants to implement a new inventory policy in terms of which the order size will be determined according to the economic order quantity model.

The following information has been obtained:

Ordering cost:$25 per order

Purchase price per metre:$50

Stockholding costs (excluding cost of capital): 20% of purchase price

Required rate of return on capital:20% per annum

Rate of inflation: 8% per annum

Lead-time:10 days

The annual demand for denim material is 20 000 metres. Raffaelo Limited is in production for 270 days per annum.

Required

(a)Calculate the cost savings if orders are placed according to the economic order quantity model. (12 marks)

(b)Determine the re-order point in terms of the proposed policy. (3 marks)

[15 marks]

BUSINESS VALUATIONS

Write brief notes on the following business valuation methods

a)Asset based valuation

b)Earnings based valuation

c)Dividend based valuation [10 marks]