Q1.The purchasing manager of Elstore Limited, an electrical components retailer holds a regular stock of among other things, quasitrons. Over the past year he has sold, on average, 25 a week and he anticipates that his rate of sale will continue during the next year (which you may take to be 50 weeks). He buys quasitrons from his supplier at the rate of 5 for 10, and every time he places an order it costs on average guide to the stockholding costs involved, the company usually value their cost of capital at 20% and as the storage space required is negligible, he decides that his figure is appropriate in this case. Furthermore, the prices charged to customers are determined by taking the purchasing and stockholding costs and applying a standard mark up of 20%.

Required

a) Currently the manager is reviewing his ordering and pricing policies and needs to know

how many quasitrons he should order each time and what price he should charge. What

would be your advice? (State any assumptions that you make).

b) If he's now finds out that he can get a discount of 5% for ordering in batches of 1,000

would you advise him to amend the ordering and pricing policy that you have suggested

and, if so, to what?

c) How large would the percentage hold cost have to be for the manager to be indifferent

between taking advantage of the quantity discount and maintaining the original ordering policy that you have suggested? Comment on the value that you have obtained.