Holding costs – NBC Institute

FM – May 2018 – L3 – SB – Q3 – Working Capital Management

Calculate the optimal re-order quantity, compare suppliers, and evaluate limitations in Kehinde's inventory management.

Question

Kehinde is a wholesaler who buys and sells a wide range of products, including electrical component TK. Kehinde sells 24,000 units of TK each year at a unit price of N2,000. Sales of TK normally follow an even pattern throughout the year. To prevent stock-outs, Kehinde keeps a minimum inventory of 1,000 units. Further supplies of TK are ordered whenever the inventory falls to this minimum level, and the time lag between ordering and delivery is small and can be ignored.

At present, Kehinde buys all his supplies of TK from Ajoke Limited and usually purchases them in batches of 5,000 units. His most recent invoice from Ajoke Limited was as follows:

Item	Amount (N’000)
Basic price: 5,000 units of TK at N1,500 per unit	7,500
Delivery charges:
– Transport at N50 per unit	250
– Fixed shipment charge per order	100
Total	7,850

Kehinde also estimates an ordering cost of N50,000 per order, comprising administrative costs and sample checks, which does not vary with the order size.

Kehinde stores TK in a warehouse rented at N500 per square metre per annum, with excess capacity sublet at N400 per square metre annually. Each unit of TK in inventory requires 2 square metres of space. Other holding costs are estimated at N1,000 per unit per annum.

Kehinde has recently learned that another supplier, Ema Limited, offers discounts for large orders. Ema Limited’s pricing structure is as follows:

Order Size	Price per unit (N)
1 – 2,999	1,525
3,000 – 4,999	1,450
5,000 and over	1,425

In other respects (delivery charges and order lead time), Ema Limited’s terms match those of Ajoke Limited.

Required:

a. Calculate the relevant:
i. Cost per order
ii. Holding cost per unit per annum (4 Marks)

b. Irrespective of your answers in (a) above and assuming a cost per order of N150,000 and holding cost per unit per annum of N1,800, calculate the optimal re-order quantity for TK and the associated annual profit Kehinde can expect from the purchase and sale, assuming that he continues to buy from Ajoke Limited. (6 Marks)

c. Prepare calculations to determine if Kehinde should buy TK from Ema Limited instead of Ajoke Limited, and in what batch size. (7 Marks)

d. Discuss the key limitations of the method of analysis you used. (3 Marks)

Answer

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Tags: Economic Order Quantity, Holding costs, Inventory Management, Order Costs, Supplier Analysis
Level: Level 3

Topic: Working Capital Management
Series: MAY 2018

MA – Nov 2018 – L2 – Q3a – Cost-volume-profit (CVP) analysis

Calculation of the Economic Order Quantity (EOQ) and analysis of the impact of a quantity discount on total inventory costs.

Question

The quarterly demand for an item of raw materials is estimated at 2,000 units at a purchase price of GH¢180 per unit. It is estimated that the cost per order will be GH¢270 and the cost of holding a unit of material in inventory will be GH¢24.

Required:

i) Compute the optimal order quantity, and total minimum costs. (4 marks)

ii) Suppose a supplier offers 5% quantity discount for purchase of 8,000 units, should the offer be accepted? (3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Discounts, Economic Order Quantity (EOQ), Holding costs, Inventory Costs, Ordering costs
Level: Level 2

Topic: Cost-Volume-Profit (CVP) Analysis
Series: NOV 2018

MA – Nov 2015 – L2 – Q4 – Other aspects of performance measurement

Discuss the relevant costs for EOQ, motives for holding stock, and compute EOQ and associated costs for Quaku Manu Limited.

Question

What are the two most relevant costs for determining the Economic Order Quantity? Give THREE (3) specific examples in each case. (6 marks)
b) Examine the THREE (3) motives for holding stocks. (3 marks)
c) Explain Economic Order Quantity and discuss TWO (2) of its relevance. (3 marks)
d) Quaku Manu Limited purchases and sells CDs. The company has been experiencing stock shortages and excess stocks at certain times in the year. The manager is concerned about the impact of overstocking and understocking and is therefore requesting you to assist in determining the most economic quantity of CDs to order. He has made the following information available to you:

Item	Value
Sales per annum	GHS 20,000,000
Units of items sold	200,000 units
Markup on cost of purchases	25% of purchase price
Ordering cost per order	GHS 200
Holding cost per unit	5% of unit price

Required:
i) Determine the economic order quantity. (2 marks)
ii) What is the annual ordering cost? (2 marks)
iii) Determine the annual holding cost. (2 marks)
iv) How many times in a year will the company order for goods? (1 mark)
v) What is the purchase value per order quantity? (1 mark)
(Total = 20 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: EOQ, Holding costs, Inventory Management, Ordering costs, Stock motives
Level: Level 2

Topic: Other Aspects of Performance Measurement
Series: NOV 2015

FM – May 2018 – L3 – SB – Q3 – Working Capital Management

Calculate the optimal re-order quantity, compare suppliers, and evaluate limitations in Kehinde's inventory management.

Question

At present, Kehinde buys all his supplies of TK from Ajoke Limited and usually purchases them in batches of 5,000 units. His most recent invoice from Ajoke Limited was as follows:

Item	Amount (N’000)
Basic price: 5,000 units of TK at N1,500 per unit	7,500
Delivery charges:
– Transport at N50 per unit	250
– Fixed shipment charge per order	100
Total	7,850

Kehinde also estimates an ordering cost of N50,000 per order, comprising administrative costs and sample checks, which does not vary with the order size.

Kehinde has recently learned that another supplier, Ema Limited, offers discounts for large orders. Ema Limited’s pricing structure is as follows:

Order Size	Price per unit (N)
1 – 2,999	1,525
3,000 – 4,999	1,450
5,000 and over	1,425

In other respects (delivery charges and order lead time), Ema Limited’s terms match those of Ajoke Limited.

Required:

a. Calculate the relevant:
i. Cost per order
ii. Holding cost per unit per annum (4 Marks)

c. Prepare calculations to determine if Kehinde should buy TK from Ema Limited instead of Ajoke Limited, and in what batch size. (7 Marks)

d. Discuss the key limitations of the method of analysis you used. (3 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Economic Order Quantity, Holding costs, Inventory Management, Order Costs, Supplier Analysis
Level: Level 3

Topic: Working Capital Management
Series: MAY 2018

MA – Nov 2018 – L2 – Q3a – Cost-volume-profit (CVP) analysis

Calculation of the Economic Order Quantity (EOQ) and analysis of the impact of a quantity discount on total inventory costs.

Question

Required:

i) Compute the optimal order quantity, and total minimum costs. (4 marks)

ii) Suppose a supplier offers 5% quantity discount for purchase of 8,000 units, should the offer be accepted? (3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Discounts, Economic Order Quantity (EOQ), Holding costs, Inventory Costs, Ordering costs
Level: Level 2

Topic: Cost-Volume-Profit (CVP) Analysis
Series: NOV 2018

MA – Nov 2015 – L2 – Q4 – Other aspects of performance measurement

Discuss the relevant costs for EOQ, motives for holding stock, and compute EOQ and associated costs for Quaku Manu Limited.

Question

Item	Value
Sales per annum	GHS 20,000,000
Units of items sold	200,000 units
Markup on cost of purchases	25% of purchase price
Ordering cost per order	GHS 200
Holding cost per unit	5% of unit price

Answer

Find Related Questions by Tags, levels, etc.

Tags: EOQ, Holding costs, Inventory Management, Ordering costs, Stock motives
Level: Level 2

Topic: Other Aspects of Performance Measurement
Series: NOV 2015

Question Tag: Holding costs

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FM – May 2018 – L3 – SB – Q3 – Working Capital Management

Calculate the optimal re-order quantity, compare suppliers, and evaluate limitations in Kehinde's inventory management.

MA – Nov 2018 – L2 – Q3a – Cost-volume-profit (CVP) analysis

Calculation of the Economic Order Quantity (EOQ) and analysis of the impact of a quantity discount on total inventory costs.

MA – Nov 2015 – L2 – Q4 – Other aspects of performance measurement

Discuss the relevant costs for EOQ, motives for holding stock, and compute EOQ and associated costs for Quaku Manu Limited.

FM – May 2018 – L3 – SB – Q3 – Working Capital Management

Calculate the optimal re-order quantity, compare suppliers, and evaluate limitations in Kehinde's inventory management.

MA – Nov 2018 – L2 – Q3a – Cost-volume-profit (CVP) analysis

Calculation of the Economic Order Quantity (EOQ) and analysis of the impact of a quantity discount on total inventory costs.

MA – Nov 2015 – L2 – Q4 – Other aspects of performance measurement

Discuss the relevant costs for EOQ, motives for holding stock, and compute EOQ and associated costs for Quaku Manu Limited.

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FM – May 2018 – L3 – SB – Q3 – Working Capital Management

Calculate the optimal re-order quantity, compare suppliers, and evaluate limitations in Kehinde's inventory management.

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MA – Nov 2018 – L2 – Q3a – Cost-volume-profit (CVP) analysis

Calculation of the Economic Order Quantity (EOQ) and analysis of the impact of a quantity discount on total inventory costs.

You're reporting an error for "MA – Nov 2018 – L2 – Q3a – Cost-volume-profit (CVP) analysis"

MA – Nov 2015 – L2 – Q4 – Other aspects of performance measurement

Discuss the relevant costs for EOQ, motives for holding stock, and compute EOQ and associated costs for Quaku Manu Limited.

You're reporting an error for "MA – Nov 2015 – L2 – Q4 – Other aspects of performance measurement"

FM – May 2018 – L3 – SB – Q3 – Working Capital Management

Calculate the optimal re-order quantity, compare suppliers, and evaluate limitations in Kehinde's inventory management.

You're reporting an error for "FM – May 2018 – L3 – SB – Q3 – Working Capital Management"

MA – Nov 2018 – L2 – Q3a – Cost-volume-profit (CVP) analysis

Calculation of the Economic Order Quantity (EOQ) and analysis of the impact of a quantity discount on total inventory costs.

You're reporting an error for "MA – Nov 2018 – L2 – Q3a – Cost-volume-profit (CVP) analysis"

MA – Nov 2015 – L2 – Q4 – Other aspects of performance measurement

Discuss the relevant costs for EOQ, motives for holding stock, and compute EOQ and associated costs for Quaku Manu Limited.

You're reporting an error for "MA – Nov 2015 – L2 – Q4 – Other aspects of performance measurement"

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