April
1999 QUESTION 2 Total Marks: 20 Marks |
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questions
GRADE A
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| (a) | State four assumptions of the basic Economic Order Quantity (EOQ) method in Inventory control. | [4] |
| 1. Known constant
price per unit 2. Instant replenishment 3. Known constant ordering cost 4. Known constant stock carrying cost
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| (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] | |
EOQ = [(2*D*Co)] / Cc |
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| (ii) At what inventory level should a reorder be placed to prevent having to draw on the safety stock? | [2] | |
| Weekly demand =
2,600,000 / 52 = 50,000 Inventory
level where re-order should be placed =
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| (iii) What are the total inventory costs? | [5] | |
| Total ordering cost =
(2,600,000 / 510,000) * 5000 = 25, 490 » 25,500 Total carrying cost = (2% * 5) * (( 0.5 *
510000)+ 200,000) Total inventory cost = 25, 500 +
45, 500
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| (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] | |
| Total inventory cost = [ ( 2,600,000 / 65,000) * 1500 ] + ( 2% * 5) * [ (0.5 * 650,000) + 200,000] = 6000 + 52, 500 = $58,500 It will be
of CAIA's advantage to order under this alternative because they would be able to save
$12, 500.
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