Question:

(a) (i) What are the assumptions to be respected while deriving the Economic Order Quantity formula.

(ii) Describe the several components of inventory holding cost.

(b) To produce a part, Skin M Ltd purchases all the material from the same vendor. The annual demand is 10,000 units, ordering cost is Rs10 and the storage cost per year is 15% of the purchase cost and interest rates are 5%.

(i) If the purchase cost is Rs2 per unit what order quantity would you recommend?

(ii) What is the total annual inventory cost?

(iii) Consider that the purchase cost falls to Rs1.75 per unit for an order size of 500 or more. Now what is your recommended order quantity?

(iv) Would this decision change if the vendor provide the following

discount structure:
Order<500 units: Rs2 per unit;
500<= Order< 1,000 units: Rs1.75 per unit;
Order >=1,000 units: Rs1.50 per unit.