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Question - Raffaelo Limited manufactures denim trousers from material purchased from an external supplier. The management of Raffaelo Limited has maintained an order quantity of 350 metres of denim material.
The accountant of the enterprise wants to implement a new inventory policy in terms of which the order size will be determined according to the economic order quantity model.
The following information has been obtained:
Ordering cost:
Purchase price per metre: $25 per order $50 Stockholding costs (excluding cost of capital): 20% of purchase price
Required rate of return on capital:
Rate of inflation:
Lead-time: 20% per annum
8% per annum 10 days
The annual demand for denim material is 20 000 metres. Raffaelo Limited is in production for 270 days per annum.
Required -
(a) Calculate the cost savings if orders are placed according to the economic order quantity model.
(b) Determine the re-order point in terms of the proposed policy.
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