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Tutorial 2.1 A

Tutorial 2.1
Question 1
Rico Enterprises CC uses the economic order quantity (EOQ) model to establish the reorder
quantity for raw material Y. The company holds no buffer inventory. Information relating to raw
material Y is as follows:
Annual usage is set at 48 000 units
Purchase price N$80 per unit
Ordering costs N$120 per order
An annual holding cost is calculated at 10% of the purchase price.
The manager recently entered into discussions with the sole supplier of raw material Y and the
supplier offered a discount of 5% on the purchase price if each order placed is for 2 000 units.
The EOQ for raw material Y before the discussions
The total annual cost of purchasing raw material Y as it is now
The total savings, if any, to Rico Enterprises CC when they accept the
List one example of holding costs
Question 2
Given the current state of the Namibian economy since the last quarter of 2016, the government
which is considered as the main employer has frozen most of the recruitments. As a result,
graduates are encouraged to be prepared to cope with this challenge until such a time the
economy recovers. Maria Abel is one of such graduates who are currently experiencing such a
Luckily, her uncle is willing to assist her with some capital (funds) in order to start up her own
business. Given the high demand for Birth Day Cakes (BDCs) in her town, Maria is contemplating
to venture into this business where she will operate as a franchisee. She will be ordering the birth
day cakes directly from a supplier in Cape Town, and sell them to locals across Windhoek.
However, her uncle would only sanction the funds if she demonstrates to him that she is clear on
how the business will operate. As such, among other things; he requested her to prepare an
estimate report of how she will manage her inventory (i.e. birth day cakes).
Below is an extract from Maria’s estimate report that she intends to present to her uncle:
Estimated demand for birth day cakes per week
Maximum sales per week
Minimum sales per week
Delivery time
1 – 2, weeks
Additional information:
It will cost Maria N$ 250 to place an order. The supplier charges N$ 800 per cake which excludes
customs and transportation costs. She has a choice of either: paying the customs and
transportation costs separately, or the two could be factored into the purchase price by the
supplier. She opts for the latter. Customs and transportation charges are two and half percent
and three percent of the purchase price, respectively. Storage costs are estimated at one percent
of the purchase price per birth day cake per year.
You as a close friend of Maria, she requested you to assist her in answering the following
questions before she presents her estimate report to her uncle. Assume a 52 week working year.
Required: The questions should be answered in the context in which they have Marks
been asked:
2.1. Apart from the information provided above, what other crucial information
would you advise Maria to incorporate into her estimate report in order to
strengthen it?
2.2. Determine the order quantity that would result in the lowest total holding and
total ordering costs.
2.3. Compute the number of orders that Maria should place per annum.
2.4. What would be Maria’s Re-order level?
2.5. Determine Maria’s Maximum inventory level.
2.6. Suppose you have been informed that no other expenses are expected to be
incurred by Maria apart from what have been discussed above. Determine the
total annual inventory cost.
2.7. True/False: Both holding and ordering costs are examples of fixed costs
whereas the purchase price is an example of a variable cost.