QUESTION 2 [25 MARKS]

Galaxy Tennis Ball Club purchases tennis balls at P20 per dozen from its suppliers. The Galaxy Club will sell 40,300 dozens of tennis balls evenly throughout the year. The total cost to handle a purchase order is P10. The insurance, property tax and rent for each dozen tennis balls in the average inventory is P0.40. The Club wants a 5% return on average inventory investment. Required:

a. Compute the economic order quantity. (9 marks)

b. Compute the total annual inventory expenses needed to sell 40,300 dozens of tennis balls if orders are placed according to economic order quantity computed in part 1. (6 marks)

c. Explain any five limitations of the Economic order quantity. (10 marks)