- 10 Marks
FM – L2 – Q107 – Inventory Management
Question
Kweku Ltd, a manufacturer of groundnut paste, is evaluating whether to continue with its economic order quantity (EOQ) or accept a special order from a foreign supplier for groundnut purchases. The relevant financial data is provided below:
| Description | Value |
|---|---|
| Purchase price per bag of groundnut | GH¢360 |
| Holding cost per annum (10% of the cost of a bag of groundnut) | GH¢36 |
| Ordering cost per order | GH¢7.70 |
| Annual demand of groundnut paste | 6,240 bags |
| Normal usage per month | 520 bags |
| Minimum usage per month | Not specified |
| Maximum usage | Not specified |
Required:
The foreign supplier offers an 8% reduction in the price per bag of groundnut if Kweku Ltd orders 3,000 bags each time. Advise Kweku Ltd on whether to accept the supplier’s offer.
Answer
Economic order quantity = √((2 × (520 × 12) × 7.70) / (10% × 360))
EOQ = √(96,096 / 36) = 51.67 bags = 52 bags
Total material cost using EOQ as orders
Total cost = Purchase cost + Ordering cost + Holding cost
= (520 × 12 × 360) + (6,240 / 52 × 7.7) + (52 / 2 × 10% × 360)
= 2,246,400 + 924 + 936
= GH¢2,248,260.00
Total material cost if foreign supplier’s offer is accepted.
Total Cost = Purchase cost + Ordering cost + Holding cost
= (6,240 × 92% × 360) + (6,240 / 3,000 × 7.7) + (3,000 / 2 × 92% × 10% × 360)
= 2,066,688 + 16.02 + 49,680
= GH¢2,116,384.02
Decision
It is advisable to accept the order from the foreign supplier because GH¢131,875.98 (GH¢2,248,260.00 − GH¢2,116,384.02) would be saved.
- Topic: Inventory Management
- Uploader: Samuel Duah