QUESTION 1

a) The annual demand for Praise Limiteds inventory is 10,500 units. The item costs GH400 a unit to purchase. The holding cost for one unit for one year is 12% of the unit cost and ordering costs are GH450 per order. The supplier offers a 2% discount for orders of 700 units or more and a discount of 3% for orders of 950 units or more.

Required:

Determine the cost minimising order size of the company. [10 marks]

b) Kwame after his National Service and with no hope of securing a job in the formal sector has decided to run a taxi service. The following forecast has been made for the operation of a service between Abisim and Sunyani.

i) Revenue totaling GH300 a week for 52 weeks in a year. This is net of fuel and other variable costs.

ii) Tyres; four pieces for a year at GH120 per unit.

iii) Maintenance and servicing; GH120 per month.

iv) Salaries GH3,000 per year

v) Insurance GH350 per year

The net cash flow will increase at 5% per annum for the next five years due to inflation. The cost of the vehicle is estimated at GH28,000. The project appears quite profitable based on the NPV criteria using the Government policy rate of 26%. However the banks are offering rates far higher than the policy rate.

Required:

You are to calculate the break-even rate for the project