Question Tag: Economic Order Quantity

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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.

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

PM – May 2021 – L2 – Q5 – Decision-Making Techniques

Calculate the optimal order quantity to maximize expected profits considering ordering constraints and probability distribution of demand.

Question

A national boutique chain sells a wide range of high-quality customized fashion goods. One particular outfit is bought at ₦8,000 and sold at ₦13,000. Mean holding costs per season per outfit are ₦500, and it costs ₦80,000 to order and receive goods in stock. The manufacturers require orders in advance, and once a batch is made, it is impossible to place a repeat order. Additionally, delivery cannot be staggered over the fashion season.

When a customer buys an outfit that requires adjustments, alterations are made, and the customer collects it later. Generally, if an outfit is out of stock at one boutique, it can be obtained from another branch within hours. However, if the chain as a whole runs out of stock, it loses both the outfit’s profit and an estimated ₦2,000 profit from additional items customers typically buy. If excess stock remains at season’s end, it is disposed of at ₦5,000 per outfit.

The sales pattern for a comparable outfit indicates the following probability distribution for total chain sales:

Outfits Sold	Probability
1,100	0.30
1,200	0.40
1,300	0.20
1,400	0.10

The management accountant must determine the optimal order quantity for the upcoming season to maximize expected profit, factoring in overstocking and understocking costs.

Required:
a) Determine the number of outfits to order to maximize expected profits.
(17 Marks)

b) Compare and contrast the model developed with the classical Economic Order Quantity (EOQ) model.
(3 Marks)

Answer

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Tags: Economic Order Quantity, Fashion Retail, Holding Cost, Inventory Management, Ordering Cost
Level: Level 2

Topic: Decision-making techniques
Series: MAY 2021

PM – May 2022 – L2 – SA – Q7 – Budgeting and Budgetary Control

Preparation of operational budgets and calculation of Economic Order Quantity for Eko Limited.

Question

Eko Limited is a small manufacturing company producing two high-quality products called ‘Kay’ and ‘Lay’. Both products use a raw material Tee (costing ₦30 per kg) in their manufacture. The Directors are reviewing the company’s stock management policies for the forthcoming year as part of the annual budget preparation cycle.

Due to the product specification, quality is an important factor and a quality control inspection takes place immediately after the production cycle has ended. At this point, any inferior products are rejected and only good production becomes available for sale. In addition to these losses, a certain quantity of waste is unavoidable from material Tee due to the cutting process for both products.

The following forecast information has been extracted from departmental estimates for the year ending 31st December 2020 (the budget period).

	Product Kay	Product Lay
Sales (quality approved units)	23,000	10,000
Finished goods stock increase by year-end	275	185
Post-production rejection rate (%)	2	3
Material Tee usage (per completed unit, net of wastage)	2kg	3kg
Material Tee wastage (%)	5	10

Additional Information:

Usage of raw material Tee is expected to be at a constant rate over the period.
Annual cost of holding one unit of raw material in stock is 17% of the material cost.
The cost of placing orders is ₦30 per order.
Eko Limited maintains a constant 1,000 kg of safety/buffer stock of material Tee regardless of the quantity ordered each time.

Required:
a. Prepare operational budgets for the year ending 31st December 2020 under the following headings: (Show your workings clearly)
i. Production budget for Products Kay and Lay (in units). (5 Marks)
ii. Purchases budget for Material Tee (in kgs and value). (5 Marks)

b. Calculate the Economic Order Quantity for Material Tee (in kgs). (5 Marks)

Answer

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Tags: Economic Order Quantity, Production Budget, Raw Material Purchase
Level: Level 2

Topic: Budgeting and Budgetary Control
Series: MAY 2022

QTB – May 2015 – L1 – SA – Q13 – Operations Research

Identifying the meaning of the acronym EOQ in inventory control.

Question

The acronym EOQ in inventory control system stands for:

A. Economic Order Quantity
B. Economic Optimal Quantity
C. Equilibrium Optimal Quantity
D. Economic Ordering Quality
E. Equilibrium Ordering Quality

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost Minimization, Economic Order Quantity, Inventory Control
Level: Level 1

Topic: Operations Research
Series: MAY 2015

MI – Nov 2021 – L1 – SA – Q7 – Forecasting Techniques

Calculate the EOQ for minimizing total cost.

Question

ABCD uses 240,000 units of material BC each year, which cost ₦5.40 for each unit after a 10% discount. The cost of making an order for the year is ₦15,312.50. Find the quantity that will minimize the total cost.

A. 36,893 units
B. 35,000 units
C. 26,087 units
D. 24,745 units
E. 24,000 units

Answer

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Tags: Economic Order Quantity, EOQ, Inventory Management
Level: Level 1

Topic: Forecasting Techniques
Series: NOV 2021

FM – May 2021 – L2 – Q5a – Inventory Management

Calculate the Economic Order Quantity (EOQ) and related inventory costs for Adom Furniture Ltd.

Question

a) Adom Furniture Ltd is a reputable producer of office desks. A key material that is used in the production of office desks is processed wood boards. The company produces 200,000 units of office desks annually. The production of one unit of office desk requires three units of the processed wood board. The current production level and requirements will apply going forward.

Currently, the company buys 100,000 units of the processed wood board whenever it runs out of wood. The cost price of a processed wood board is GH¢120. It costs GH¢1,000 to place an order to replenish the inventory of processed wood board. On average, it costs GH¢10 to hold one processed wood board per annum.

The company has been financing each round of inventory purchase with short-term borrowing from a bank. The loan is typically granted for three months at an annual nominal interest rate of 24%. The bank charges a loan processing fee of 1.5% of the principal, which is paid upfront. The local distributor of the processed wood board is now willing to sell the product on credit terms 2/10 net 30.

Required:

i) Compute the optimal quantity of the processed wood board the company should order whenever it places an order. (3 marks)

ii) Compute the optimal number of orders to place. (2 marks)

iii) Compute the average costs associated with the current purchase plan of 100,000 units per order and the cost if the optimal quantity is ordered instead. (4 marks)

Answer

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Tags: Economic Order Quantity, Inventory Costs, Inventory Management
Level: Level 2

Topic: Inventory Management
Series: MAY 2021

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

PM – May 2021 – L2 – Q5 – Decision-Making Techniques

Calculate the optimal order quantity to maximize expected profits considering ordering constraints and probability distribution of demand.

Question

The sales pattern for a comparable outfit indicates the following probability distribution for total chain sales:

Outfits Sold	Probability
1,100	0.30
1,200	0.40
1,300	0.20
1,400	0.10

The management accountant must determine the optimal order quantity for the upcoming season to maximize expected profit, factoring in overstocking and understocking costs.

Required:
a) Determine the number of outfits to order to maximize expected profits.
(17 Marks)

b) Compare and contrast the model developed with the classical Economic Order Quantity (EOQ) model.
(3 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Economic Order Quantity, Fashion Retail, Holding Cost, Inventory Management, Ordering Cost
Level: Level 2

Topic: Decision-making techniques
Series: MAY 2021

PM – May 2022 – L2 – SA – Q7 – Budgeting and Budgetary Control

Preparation of operational budgets and calculation of Economic Order Quantity for Eko Limited.

Question

The following forecast information has been extracted from departmental estimates for the year ending 31st December 2020 (the budget period).

	Product Kay	Product Lay
Sales (quality approved units)	23,000	10,000
Finished goods stock increase by year-end	275	185
Post-production rejection rate (%)	2	3
Material Tee usage (per completed unit, net of wastage)	2kg	3kg
Material Tee wastage (%)	5	10

Additional Information:

Usage of raw material Tee is expected to be at a constant rate over the period.
Annual cost of holding one unit of raw material in stock is 17% of the material cost.
The cost of placing orders is ₦30 per order.
Eko Limited maintains a constant 1,000 kg of safety/buffer stock of material Tee regardless of the quantity ordered each time.

b. Calculate the Economic Order Quantity for Material Tee (in kgs). (5 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Economic Order Quantity, Production Budget, Raw Material Purchase
Level: Level 2

Topic: Budgeting and Budgetary Control
Series: MAY 2022

QTB – May 2015 – L1 – SA – Q13 – Operations Research

Identifying the meaning of the acronym EOQ in inventory control.

Question

The acronym EOQ in inventory control system stands for:

A. Economic Order Quantity
B. Economic Optimal Quantity
C. Equilibrium Optimal Quantity
D. Economic Ordering Quality
E. Equilibrium Ordering Quality

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost Minimization, Economic Order Quantity, Inventory Control
Level: Level 1

Topic: Operations Research
Series: MAY 2015

MI – Nov 2021 – L1 – SA – Q7 – Forecasting Techniques

Calculate the EOQ for minimizing total cost.

Question

A. 36,893 units
B. 35,000 units
C. 26,087 units
D. 24,745 units
E. 24,000 units

Answer

Find Related Questions by Tags, levels, etc.

Tags: Economic Order Quantity, EOQ, Inventory Management
Level: Level 1

Topic: Forecasting Techniques
Series: NOV 2021

FM – May 2021 – L2 – Q5a – Inventory Management

Calculate the Economic Order Quantity (EOQ) and related inventory costs for Adom Furniture Ltd.

Question

Required:

i) Compute the optimal quantity of the processed wood board the company should order whenever it places an order. (3 marks)

ii) Compute the optimal number of orders to place. (2 marks)

iii) Compute the average costs associated with the current purchase plan of 100,000 units per order and the cost if the optimal quantity is ordered instead. (4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Economic Order Quantity, Inventory Costs, Inventory Management
Level: Level 2

Topic: Inventory Management
Series: MAY 2021

Question Tag: Economic Order Quantity

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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.

PM – May 2021 – L2 – Q5 – Decision-Making Techniques

Calculate the optimal order quantity to maximize expected profits considering ordering constraints and probability distribution of demand.

PM – May 2022 – L2 – SA – Q7 – Budgeting and Budgetary Control

Preparation of operational budgets and calculation of Economic Order Quantity for Eko Limited.

QTB – May 2015 – L1 – SA – Q13 – Operations Research

Identifying the meaning of the acronym EOQ in inventory control.

MI – Nov 2021 – L1 – SA – Q7 – Forecasting Techniques

Calculate the EOQ for minimizing total cost.

FM – May 2021 – L2 – Q5a – Inventory Management

Calculate the Economic Order Quantity (EOQ) and related inventory costs for Adom Furniture Ltd.

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.

PM – May 2021 – L2 – Q5 – Decision-Making Techniques

Calculate the optimal order quantity to maximize expected profits considering ordering constraints and probability distribution of demand.

PM – May 2022 – L2 – SA – Q7 – Budgeting and Budgetary Control

Preparation of operational budgets and calculation of Economic Order Quantity for Eko Limited.

QTB – May 2015 – L1 – SA – Q13 – Operations Research

Identifying the meaning of the acronym EOQ in inventory control.

MI – Nov 2021 – L1 – SA – Q7 – Forecasting Techniques

Calculate the EOQ for minimizing total cost.

FM – May 2021 – L2 – Q5a – Inventory Management

Calculate the Economic Order Quantity (EOQ) and related inventory costs for Adom Furniture Ltd.

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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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PM – May 2021 – L2 – Q5 – Decision-Making Techniques

Calculate the optimal order quantity to maximize expected profits considering ordering constraints and probability distribution of demand.

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PM – May 2022 – L2 – SA – Q7 – Budgeting and Budgetary Control

Preparation of operational budgets and calculation of Economic Order Quantity for Eko Limited.

You're reporting an error for "PM – May 2022 – L2 – SA – Q7 – Budgeting and Budgetary Control"

QTB – May 2015 – L1 – SA – Q13 – Operations Research

Identifying the meaning of the acronym EOQ in inventory control.

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MI – Nov 2021 – L1 – SA – Q7 – Forecasting Techniques

Calculate the EOQ for minimizing total cost.

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FM – May 2021 – L2 – Q5a – Inventory Management

Calculate the Economic Order Quantity (EOQ) and related inventory costs for Adom Furniture Ltd.

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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.

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

PM – May 2021 – L2 – Q5 – Decision-Making Techniques

Calculate the optimal order quantity to maximize expected profits considering ordering constraints and probability distribution of demand.

You're reporting an error for "PM – May 2021 – L2 – Q5 – Decision-Making Techniques"

PM – May 2022 – L2 – SA – Q7 – Budgeting and Budgetary Control

Preparation of operational budgets and calculation of Economic Order Quantity for Eko Limited.

You're reporting an error for "PM – May 2022 – L2 – SA – Q7 – Budgeting and Budgetary Control"

QTB – May 2015 – L1 – SA – Q13 – Operations Research

Identifying the meaning of the acronym EOQ in inventory control.

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MI – Nov 2021 – L1 – SA – Q7 – Forecasting Techniques

Calculate the EOQ for minimizing total cost.

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FM – May 2021 – L2 – Q5a – Inventory Management

Calculate the Economic Order Quantity (EOQ) and related inventory costs for Adom Furniture Ltd.

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