Page 207 - 5.2 i. Manac Finance ITC Summarised Notes

MANAGEMENT OF WORKING CAPITAL

The management of inventory

• Ordering cost = cost per order x (annual demand / order
quantity)

• Re-order point = (average lead time x average daily usage) +
safety stock

• How many items are left in inventory when the next order is placed.

• Total cost of inventory = acquisition cost + ordering cost +
holding cost

NB: If discounts for bulk purchases are available, it may be
cheaper to buy inventory in larger order sizes so as to obtain the
discounts.

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