Management Accounting 2 Thank you very much for taking the time to respond to my question. Wish u have a nice day and stay safe from this pandemic, dear Tu.tor ^^

12.

The Finetread Tyre Company imports steel-belted radial car tyres from overseas and resells them at its discount tyre shops. In the past it has had no special inventory policy other than some vague notion that inventory should turn over about four times per year and hence each order should be approximately equal to one-quarter of the expected annual demand.

In order to examine the possible advantages of a more scientific approach, Finetread engage you to prepare an analysis for one tyre size, 165 SR 13, which fits certain popular small cars. You ascertain the following information.

The invoice price FOB Taiwan is $A40.00 per tyre. Freight charges and import duties add 40% to the purchase price. Annual demand is uncertain but the following probability distribution is believed to reflect the possibilities:

Demand (tyres) Probability

10 000 0.2

14 000 0.5

20 000 0.3

The purchasing department processes approximately 200 purchase orders a month. Direct labour cost associated with processing of each purchase order is $35. The cost of forms, supplies and other variable inputs is $200 per month.

Payments are processed in the accounting department. Work sampling studies indicate that the labour cost averages $24 an order. The bureau charge for data processing is $3.20 per order and electricity and other variable costs of data processing amount to 40 cents an order. All purchased items are inspected in the receiving department at a cost of $24 per order for this class of goods. Annual insurance amounts to 7% of the cost of the average quantity of inventory on hand.

The company rents one warehouse on a 20-year lease at an average annual cost of $8.50 per square metre. Comparable warehouse space in the area now rents for $11.20 per square metre. Tyres can be stacked 10 high, and after allowing for aisle space, each stack requires a square metre of floor space. Space must be available for twice the anticipated average inventory quantity. Warehouse labour costs average 10% of the average inventory value in an average year. Investment proposals are expected to produce a return of at least 20% before taxes.

Required:

(a) With a view to implementing the EOQ model, calculate:

(i) The annual demand figure to be inserted into the EOQ formula.

(3 marks)

(ii) The order cost per order.

(4 marks)

(iii) The cost of holding one tyre for one year.

(3 marks)

(b) Calculate the economic order quantity.

(4 marks)

(c) Calculate the annual inventory cost for this order size (excluding purchase outlay).

(d) Compare this with the annual inventory cost of the crude policy of ordering four times a

year.

(6 marks)