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Calculate the cost of the prediction error

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A company manufactures a product having monthly demand of 250 units. For one unit of finished product 2 kg. of a particular raw material is needed. The purchase price of the raw material is Rs. 90 per Kg. The cost of processing an order is Rs.120 and the cost of storage is estimated to be Rs.16 per unit per annum.

Question (i) What is the optimal order quantity and the total relevant cost of this order quantity?

Question (ii) Suppose that Rs.120, an estimate of the cost of processing an order and Rs.16, an estimate of per unit per annum cost of storage proved incorrect and the costs incurred were Rs.60 and Rs.18 respectively. Calculate the cost of this prediction error assuming that the solution to part (i) has been implemented for one year?

Reference no: EM132609942

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