Tracey Chen, the CFO, has received numerous emails over the last few months, from David Matthews, the Business Unit Manager of Foleo Retailing NZ. His correspondence has identified serious inventory management issues, allegedly stemming from the Australian operations, which are affecting the performance of his business unit. Assume you are the management accountant for the Foleo Group and have been called into a meeting with Tracey to discuss this issue. Below is an excerpt from the data sent to her by David, which highlights regular instances of stock-outs, indicating poor inventory management. Tracey asks you to look into this data, analyse the inventory management processes of the NZ Warehouse and provide a recommendation for improvement.

"The monthly demand for SliFones in the NZ market is unpredictable, but typically fluctuates between400 and 700 unitsper month. Our Warehouse orders1,600 unitsevery two months, however the maximum that are delivered on any order from Foleo Fones is800 units, making it impossible to meet demand let alone build up any sort of stock. The reason given by the Australian Warehouse Supervisor is that there simply isn't enough stock of the SliFones to send.

Based on our last 6 months of operations, I estimate that our annual requirement for SliFones will be6,000units, and our associated carrying costs for this inventory item is$5.22per unit. Each time we place an order with Foleo Fones, the order takesa month and a halfto arrive and costs our NZ operations$75.28for the activities required - this is why we only order every two months."

Calculate the following and show your workings:

(a) The optimal order quantity of SliPhones that Foleo Retailing NZ should be ordering, using the EOQ formula

(b) The number of orders that would be placed per year by Foleo Retailing NZ

(c) The total annual cost of ordering and holding the inventory of SliFones, using the order quantity calculated in part (a)

2) Calculate the average usage per month, the safety stock and the reorder point for the SliFones. Show your workings.

3)Use your calculations from the previous parts, suggest how David can better manage his inventory of SliFones. In your answer,include the following: identifying the current practice of inventory ordering, suggesting the new order quantity and frequency that he should place orders, explaining the concept of safety stock and reorder point and make appropriate suggestions.