ZETA Ltd is a manufacturing company that uses material QUEE in its manufacturing process. On an annual basis, ZETA Ltd uses 127,690 units of material QUEE in production. The material is bought form a wide range of suppliers at an average price of K38 per unit. Because supply for material QUEE is uncertain, ZETA Ltd maintains safety inventory that is sufficient to satisfy usage for 12 days. The material is consumed at an even rate and the cost of placing an order is K50 per order while the cost of storage is K0.10 per unit per annum. Current ordering policy Currently, the company places orders of 20,000 units each of material and this policy has been in place for over five years. However, ZETA Ltd has recruited a new Procurement Officer and a new Finance Manager who have replaced those who have now left the company. Proposal 1 The newly recruited Procurement officer has proposed to change this ordering policy to the use of the economic order quantity model. She has explained that the use of the economic order quantity model would result in some cost savings as a better order size would be used. Proposal 2 The newly recruited finance manager has information that one of the suppliers of the material has proposed to offer a quantity discount of 1.5% for orders of 50,000 units and more. The finance manager has therefore proposed that the order size should be increased to 50,000 units per order. ZETA Ltd has a working year of 365 days.

Required:

(a) Calculate the total annual cost, including the purchase cost for:

(i) The current ordering policy (ii) The ordering policy based on proposal 1 (iii) The ordering policy based on proposal 2 [12 Marks]

(b) Based on the computations in part (a) above, explain whether ZETA Ltd should continue with the current ordering policy or should change to the ordering policy based on either proposal 1 or proposal 2. [3 Marks]

(c) Explain five (5) limitations of the economic order quantity model. [5 Marks] [TOTAL: 20 MARKS]