Question $4$

Langanga Auto Springs Company requires a total of $20,000$ bars of steel $(10$ meters each$)$ of

inventory for a production run. Assume that Lunganga places two orders of inventory of

$10,000$ steel bars each. Inventory would be paid for with cash, and ordering and holding costs

would be paid at the end of the production run. Each steel bar costs Kshs$.450,$ order costs are

Kshs$.50$ per average inventory unit $($steel bar$).$ Lunganga has a cost of capital of $10\%.$ Assume

the inventory is consumed at a steady rate and the production run is $80$ days.

The financial manager of Lunganga wants to make certain that his inventory decisions

maximize shareholder wealth.

Required:

a$)$ What is the present value cost of managing the inventory process?

$(10$ marks$)$

b$)$ The financial manager is considering a change in inventory policy. She is considering

increasing the number of orders to $4$ for each production run. Would you recommend that

this policy change be implemented? Support your recommendation with appropriate

computations.

$(10$ marks$)$

c$)$ Why is inventory such a difficult working capital item to manage?

$(5$ marks$)$