SPanelD$$s procurement manager has heard about using economic order quantity $($EOQ$)$ to minimise

ordering and holding costs. The procurement manager has provided you with the following information

as well as the result he received when entering the information into Artificial Intelligence software.

$1\mathrm{.}1$ The procurement manager, in line with company policy, may order the silica sand in quantities

of full tonnes only. To ease his workload and adhere to company policy the manager has

previously ordered two tonnes of silica sand on the first day of each month.

$1\mathrm{.}2$ SPanelD is expected to require $24$ tonnes of silica sand for the $2025$ financial year starting on

the $1$st of July $2024.$

$1\mathrm{.}3$ The supplier sells the required silica sand in bulk bags holding $5001$kg of silica sand per bag at

R$1503$per bag.

$1\mathrm{.}4$ SPanelD rents container space at R$60$ per $5001$kg bulk bag per year to store the silica bought.

$1\mathrm{.}5$ Due to the harmful dust silica sand can produce air monitoring is conducted at R$100$ per tonne

per year.

$1\mathrm{.}6$ The interest income foregone on the amount invested in inventory amounts to $2\%$ per year of

the purchase price of the silica sand per tonne.

$1\mathrm{.}7$ Fixed ordering costs increased from the previous year$$s R$1301$per order by $5\%$ for the $2025$

financial year.

$1\mathrm{.}8$ The EOQ formula is $$

$2\backslash$times $\backslash$times $$

$+(\backslash$times $)$

$1\mathrm{.}9$ The procurement manager entered the information above into artificial intelligence $($AI$)$ software

and asked the AI to calculate the savings in the ordering cost for the $2025$ financial year if EOQ

is used rather than the current method. The AI software provided the following answer:

$$First$,$ let's calculate the parameters needed for the EOQ formula:

U $=24$ tonnes

C $=$ R$130$ x $1,05=$ R$136,50$

H $=($Interest income foregone $+$ Container space rental cost per bag$)/$ Purchase cost per

tonne $=(2\%+($R$60/$ R$150)=0,42$

P $=$ R$150$ per bag

i $=2\%$

Now, let's calculate the EOQ using the given formula:

EOQ $=((2\backslash$times U $\backslash$times C$)/($H $+($P $\backslash$times i$)))$

EOQ $=((2\backslash$times $24\backslash$times R$136,50)/(0,42+($R$150\backslash$times $0,02)))$

EOQ $(6576/(0,42+3))$

EOQ $(1922,81)$

EOQ $43,8443($rounded$)$

Page $10$ of $10$

MAC$3701$

May$/$June $2024$

CONFIDENTIAL $[$TURN OVER$]$

PART E $($continued$)$

Now, let's calculate the cost of ordering at the EOQ:

Cost of ordering at EOQ $=($C $\backslash$times EOQ $/2)$

Cost of ordering at EOQ $=($R$136,50\backslash$times $43/2)$ R$2924$

Next, let's calculate the total cost of ordering with the current method:

Total cost of ordering with current method $=($Total number of orders per year$)\backslash$times $($Cost per

order$)$

Total number of orders per year $=$ Annual requirement $/$ Quantity per order

Total number of orders per year $=24$ tonnes $/(500$ kg $/1000)=48$

Cost of ordering with current method $=(48\backslash$times R$136,50)$ R$6552$

Now, let's find the savings in ordering costs:

Savings in ordering costs $=$ Cost of ordering with current method $-$ Cost of ordering at EOQ

Savings in ordering costs $=$ R$2924-$ R$6552$ R$3628$

Therefore, the savings in ordering costs for the $2025$ financial year using the EOQ model is

approximately R$3,628.$

Required PART E

$($E $-$ a$)$ Draft a memorandum to the Procurement manager $(2$ format marks$)$ in which you

critically evaluate the result received from the AI software.

In your critical evaluation, you must:

$$ Focus on the application of the relevant costing principles;

$$ Indicate whether and provide a reason why you agree$/$disagree with each

amount;

$$ Review all the information$/$workings for errors and$/$ or omissions, and

where applicable, provide correct workings;