Question

Calcit Ltd would normally rent a lock-up store to hold its stock of calculators. Annual demand is estimated at 200,000 calculators. Purchase price per calculator is £0.40 in quote 1 (minimum order 20,000 calculators) and £0.45 per calculator in quote 2. Each order has an administration cost of £300, and the storage facility would work out at £1.65 per year for each calculator held in storage. Calcit Ltd has calculated the Economic Order Quantity at 8,528 calculators. Calculate total inventory costs under each quote and advise Calcit Ltd as to which quote they should accept.

Answer 1

Total Inventory Cost in Quote1.

Total Inventory Cost = Ordering Cost + Storage Cost + Purchase Cost

= (2,00,000/20,000)*300 + (20,000/2 * 1.65) + (2,00,000*0.4) => 99,500

where Ordering Cost = Number of Orders * Cost of Ordering

Storage Cost = (Order Qty/2)* Cost of storage per qty

Inventory Cost in Quote2.

= Round Off(200,000/8,528)*300 + (8528/2*1.65) + (2,00,000*0.45) => 1,04,236

Number of Orders = 2,00,000/8,528= 23.45 but we will consider 24 orders due to round off.