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Question - The Hill Breeze Heavy Industries Limited requires 4000 units of a particular raw material per year. At the beginning of the current year the purchase department expects the purchase price @ Sh. 90 per unit while the accounting department estimated the incremented cost processing an order is Sh. 135 and the cost of storage is estimated to be Sh. 12 per unit. But the costing department is against the incremental processing cost of Sh. 135 per unit rather according to it, this should have been Sh. 80. At the commencement the supplier offers 4000 units @ Sh. 86 per unit.
The material will be delivered immediately and placed in the stores. One of the directors of the directors of the company saw that 'due to present communication system the incremental cost of placing an order .is zero but the accounting department's original estimate of Sh. 135 for placing an order for economic batch is correct. After a series of discussions of the departmental heads company reached to decision not to buy 4000 units at a time.
Required -
Do you agree with the company's decision? Why?
What is the total cost, when incremental cost process on order is Sh. 135 per unit?
What is the total cost, when incremental cost processing an order is Sh. 86?
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