April
1999 QUESTION 2 Total Marks: 20 Marks |
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| (a) | State four assumptions of the basic Economic
Order Quantity (EOQ) method in Inventory control.
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[4] |
| (b) | The CAIA company buys and then sells 2.6 million (2,600,000) tapes annually. The tapes must be bought in multiples of 2,000. Ordering costs, which include packing charges of $3,500 at $5,000 per order. The purchase price per tape is $5, and the annual carrying costs are 2% of the purchase price each tape. The company maintains a safety stock of 200,000 tapes. The delivery time is 6 times. Note: 1 year = 52 weeks | |
| (i) What is the Economic Order Quantity? | [4] | |
| (ii) At what inventory level should a reorder be placed to prevent having to draw on the safety stock? | [2] | |
| (iii) What are the total inventory costs? | [5] | |
| (iv) The supplier of CAIA agrees to pay the
packing charges if the tapes are purchases in quantities of 650,000. Would it be to CAIA's
advantage to order under this alternative? Use three significant figures in all calculations. |
[5] |