Mr. Saleem has been in the business of books since a long time. He faces the ste
ID: 2662242 • Letter: M
Question
Mr. Saleem has been in the business of books since a long time. He faces the steady demand for
the books. Whenever he runs out of inventory, he replenishes the supply by placing an order for more books from the publisher.
There are two costs associated with the inventory of the books. First, there is the order cost. Each order placed with a publisher involves a fixed handlings expense and delivery charges. The
second type of cost is the carrying cost. This includes the cost of space, insurance and losses due to spoilage or theft. The opportunity cost of the capital tied up in the inventory is also part
of the carrying cost.
Mr. Saleem plans to buy 200,000 books over the coming year. Each order that it places costs Rs.
50 and the annual carrying cost of the inventory is Rs. 0.06 per book. He may place a single
order or multiple orders as different alternatives have been provided in the following table.
Average inventory over the year would be half of the order size and therefore carrying costs
would be calculated accordingly.
Required:
(a) Fill in the table by keeping above information into consideration. (12)
Order size
(Books per year)
Order per year
Average inventory
Order cost
Carrying cost
Total cost
200,000
150,000
100,000
50,000
20,000
10,000
Order size
(Books per year)
Order per year
Average inventory
Order cost
Carrying cost
Total cost
200,000
150,000
100,000
50,000
20,000
10,000
Explanation / Answer
(a) Fill in the table by keeping above information intoconsideration. (12) Order size (Books peryear) Orderper year Average
Inventory Order Cost Carrying
Cost Total cost 200,000 1 100,000 50 6,000 6,050 150,000 2 75,000 100 4,500 4,600 100,000 2 50,000 100 3,000 3,100 50,000 4 25,000 200 1,500 1,700 20,000 10 10,000 500 600 1,100 10,000 20 2,000 1,000 120 1,120 b) Order cost increases but carrying cost decreases c) 20,000 because total ordering cost i.e. Rs. 1,100 isminimum at this level of order d) EOQ = 2 x 200,000 x 50 / 0.06 =18,257 yes it is consistent. yes it is consistent. (a) Fill in the table by keeping above information intoconsideration. (12) Order size (Books peryear) Order
per year Average
Inventory Order Cost Carrying
Cost Total cost 200,000 1 100,000 50 6,000 6,050 150,000 2 75,000 100 4,500 4,600 100,000 2 50,000 100 3,000 3,100 50,000 4 25,000 200 1,500 1,700 20,000 10 10,000 500 600 1,100 10,000 20 2,000 1,000 120 1,120
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