QUESTION FIVE [25]

5.1 Explain the meaning of the term economic order quantity and explain the significance of calculating this value. (2)

5.2 State any two (2) assumptions of the EOQ model. (2)

5.3 Spares for you sells spares for the motor and taxi industry. The company runs a mail-order business for taxi headlights. Annual demand for the headlights is 8 000 units. The annual holding cost per unit is R300 and the cost to place an order is R80. Calculate the EOQ. (3)

5.4 Study the information below and answer the questions that follow:

Normal usage or average requirement	800 units per day
Maximum usage	1 000 units per day
Minimum usage	600 units per day
Re-order period	One month (30 days)
Time required to receive emergency supplies	5 days

Calculate the following:

5.4.1 Ordering point (3)

5.4.2 Minimum limit/level (3)

5.4.3 Danger level (2)

5.5 Super Smart Clothes Ltd has annual, non-seasonal credit sales of R3 200 000. Customers are expected to pay within 30 days, but in fact have been settling in an average of 42 days. Super Smart Clothes experiences a bad-debt rate of 0.8% of debtors annually. The companys current overdraft facility is 2.5% above base-rate, which is at present 12%. Unfortunately, the overdraft limit has nearly been reached, and is unlikely to be extended. Super Smart Clothes Ltd has contacted We Help You Ltd, a factoring firm, and has been quoted:

• A factor charge of 1.8% of credit sales (Super Smart Clothes Limited estimates that this would save R25 000 administration costs per year)
• An advance of 75% of invoices at 3% over base-rate.

Required:

Should the factoring firm, We Help You Limited, terms be agreed to? (10