Reference no: EM132578222

Clean Wash Ltd. manufactures and markets automatic washing machines. Among the hundreds of components which it purchases each year from external suppliers for assembling into the finished articles are drive belts, of which it uses 400,000 units per annum. It is considering converting its purchasing, delivery and stock control of this item to a Just-In-Time (JIT) system. This will raise the number of orders placed but lower the administrative and other costs of placing and receiving orders. If successful, this will provide the model for switching most of its inwards supplies into this system.

Details of current and proposed ordering and carrying costs are given below:

Current                       Sh.10,000

Proposed                     Sh.25

Ordering cost per order  20%

Purchase cost per item Sh.2,500

Inventory holding cost (as a percentage of the purchase cost) Sh.25 20%

Required

Question (i) The economic order quantity with current and proposed arrangements.