Page 155 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Working capital management – Inventory control

Question 4

EOQ and discounts

A company has annual demand for its product of 200,000 units. Each unit costs
$5. Ordering costs are $300 per order and the annual holding cost per unit is
$0.85.

A 0.25% discount is available on all orders of at least 20,000 units and a 0.5%
discount for orders of at least 30,000 units.

Calculate the optimum order level to reduce total inventory costs.

EOQ = √(2 × $300 × 200,00/$0.85) = 11,882 units per order.

Total costs at 11,882 units (purchasing + ordering + holding costs):

200,000 × $5 + 200,000/11,882 × $300 + 11,882/2 × $0.85

$1,000,000 + $5,049.65 + $5,049.85 = $1,010,100

Total costs at 20,000 units:

200,000 × $5 × 99.75% + 200,000/20,000 × $300 + 20,000/2 × $0.85

$997,500 + $3,000.00 + $8,500 = $1,009,000

Total costs at 30,000 units:

200,000 × $5 × 99.5% + 200,000/30,000 × $300 + 30,000/2 × $0.85

$995,000 + $2,000.00 + $12,750 = $1,009,750

The optimum order level is 20,000 units.

Illustrations and further practice

Now try TYU questions 3 and 4 from Chapter 8

147