QUESTION 1 (10 MARKS)

Phoenix Sdn. Bhd is concern about the stock level of their electrical component, CR10 that appears to be too low. This material that is purchased at RM60 each are currently being ordered in quantity of 400 units per order. The company annual demand for CR10 is consistent at 10 units a day for each of the 300 workings days in a year. The ordering cost per order of the circuits is RM960. The holding cost per unit of inventory is estimated at 15% of the purchase price of CR10.

Current annual total inventory costs are RM189,000, being the total of the purchasing, ordering and holding costs of component CR10. The company has decided that it may be better to use the Economic Order Quantity (EOQ) method to establish an optimal reorder quantity.

Required:

a. Determine the optimum order size of CR10 by using EOQ formula. (3.5 marks)

b. Determine number of orders to be placed in a year based on EOQ. (1.5 marks)

c. Using your answer in (a) above, calculate the revised annual total inventory costs of CR10, and compare to the current total inventory costs. How much the company can save by using EOQ model?