Shoplift Ltd. expects to sell 120 units, per day, of line item ELECT123Z in the next financial year (assume 360 trading days in year).

The cost price per unit is R62.50

Shoplift Ltd. is very concerned about holding too much inventory. Accordingly the firm currently maintains an average inventory level (A) of just 500 units.

The fixed ordering cost for item ELECT123Z is R1800 per order (regardless of quantity).

Other costs currently include:

Opportunity cost: R? (to be calculated)

Annual storage costs per unit: R 5.63 per unit.

Annual inventory insurance cost: R3.13 per unit.

Annual depreciation and obsolescence cost: R4.38 per unit.

Cost of capital: 19.50%

Consideration must be given to the lead-time, from order to delivery, of 8 days.

The supplier of line item ELECT123Z is willing to give a discount of R0.15 on the price if more than 3000 units are ordered at a time and a discount of R0.30 if more than 5000 units are ordered at a time.

3.1 Calculate the total inventory cost (TIC) that Shoplift Ltd. currently pays for maintaining an average inventory level of 500 units.

3.2 How many orders must be placed annually based on the current average inventory level of 500 units?

3.3 Calculate the Economic Order Quantity (EOQ) that Shoplift Ltd. should order if it wants to minimize its TIC.

3.4 How many orders must be placed annually based on the EOQ?

3.5 Calculate the total inventory cost (TIC) that Shoplift Ltd. would pay if it ordered inventory based on the EOQ.

3.6 Based on your answers above, would it be worthwhile to order the EOQ? Explain.

3.7 Should any of the R0.15 discount offer be considered? Explain in detail by comparing the TIC incurred when ordering 3000 units to the TIC associated with ordering the EOQ as calculated in question 3.3.

3.8 Should any of the R0.30 discount offer be considered? Explain in detail by comparing the TIC incurred when ordering 5000 units to the TIC associated with ordering the EOQ as calculated in question 3.3.