MULTI CORPORATION
PRACTICE PROBLEM
Mulach Corporation buys and sells (as rice) 7.8 million kilograms of palay annually. The palay
must be purchased in multiples of 6,000 tons. Ordering costs, which include grain elevator
removal charges of P11,500, are P15,000 per order. Annual carrying cots are 2% of the
purchase price of P19.50 per kilogram. The company maintains 600,000 kilograms of palay as
safety stock. The delivery time is 4 weeks.
REQUIRED:
The rice processor agrees to pay the elevator removal charges if Mulach’s will purchase
palay in quantities of 1,950,000 kg. Would it be to Mulach’s advantage to order under this
alternative? Why?
No. of Orders = Annual Demand/ Order size
= 7,800,000/ 1,950,000
= 4 orders
Total Ordering Costs = No of orders x Cost per order
= 4 x 3,500
= P14,000
Total carrying cost = Average inventory x Carrying cost per unit
= (1,950,000/2) x (0.02 x P19.5)
= 975,000 x 0.39
= P380,250