NANA KOFI LIMITED
(a) The relevant cost for determining the EOQ are the holding cost and the ordering cost.
The holding cost includes:
(i) opportunity cost of investment in stock
(ii) incremental insurance cost.
(iii) incremental warehouse and storage cost
(iv) incremental material handling cost.
(v) cost of obsolescence and deterioration of stock.
The ordering cost includes:
(i) Clerical cost of preparing purchase order
(ii) Receiving deliveries
(iii) paying invoices

(b) The three motives for holding stock.
(i) Transaction motive – this occurs whenever there is a need to hold stocks to meet production and sales requirement and that it is not possible to meet this requirement instantaneously.
(ii) The precautionary motive – If a firm decides to hold an additional amount of stock to cover the possibility that it may have underestimated its future production and sales requirement or when the supply of raw materials may be unreliable because of uncertain event affecting the supply of raw materials this is called precautionary motive for requiring stock.
(iii) Speculative motive – When it is expected that future inputs prices may change, a firm might maintain higher or lower levels of stock to speculate on the expected increase or decrease in future prices. Quantitative models does not take into consideration the speculative motives, but management should be aware that optimum stock levels do depend to a certain extent on expected price movement. If input prices is expected to rice then management should stock to take advantage of input price savings.

(c) Economic order quantity – this is the ordering quantity where total cost of holding and ordering cost is at its minimum. It is the most economical quantity to order in order to minimize both incremental holding cost and ordering cost.
Relevance of economic order quantity

• It is relevant in the sense that it is the optimal quantity that ensure optimal use of resources.
• It is also relevant because it will assist to ensure that there will be minimal occurrence of stock out and excessive holding of stock with its associated consequence like inability to satisfy customers, deterioration and high rate of losses due to overstocking.

(d)

(ii) Annual ordering cost = 200,000 / EOQ × 200 = GH¢8,945
200,000 / 4,472 × 200 = GH¢8,945

(iii) EOQ / 2 × Holding cost per unit = 4,472 / 2 × 4 = 8,945

(iv) The number of times in a year the company have to order.
Annual demand / EOQ
200,000 / 4472 = APPROX 45 times

(v) EOQ × purchase price
4,472 × 80 = GH¢357,760