Question

TRAM - WAY LTD. Inventory Cost Management You are working as a Management Accountant in Tram - Way Ltd. The company engaged in the business of producing dying chemicals. Your locus is to minimise the total costs of the raw material. For this you have been provided with the following information by your assistant: Consumption of Raw Material 245000 units Cost of each raw material unit £50 Cost of placing an order 500 per order Annual cost of holding an inventory 10% of the purchase cost EOQ (Economic order quantity) 7,0X10 units **The supplier offers a price discount of £ 5 per unit for orders of 10,000 or more. Required: Caleulate in an appropriate format, the order quantity that will minimise the total costs.

Answer 1

Answer with working is given below

Option A EOQ Purchase ordering Carrying Purchase Total Cost price Cost Cost Cost $50.00 $17,500 $17,500 $12,250,000 $12,285,000 7,000 Option B Order Purchase ordering Carrying Purchase Total Cost Quantity price Cost Cost Cost 10,000 $45.00 $12,250 $25,000 $11,025,000 $11,062,250 conclusion Since Total cost is lower under Option 2 the order quantity should be 10,000 units per order Note: Ordering Cost - Total annual demand / oder quantity * Cost of Ordering Carrying Cost- Order Quantity/ 2 * Holding cost per unit

Overall Allocation and Apportionment Production Dept Service Dept Quality Total Machining Assembly Repairs Control Indirect Labor cost $15,500 $5,000 $5,000 $3,500 $2,000 Indirect Material cost $5,300 $1,500 $2,400 $1,000 $400 Factory rental $14,400 $4,000 $7,200 $800 $2,400 Power costs $4,800 $3,600 $300 $300 Depreciation $14,000 $8,000 $3,000 $1,000 $2,000 Building Insurance $1,800 $500 $900 $100 $300 Equipment Insurance $4,200 $2,400 $900 $300 $600 | $60,000 $25,000 $20,000 $7,000 $8,000 $600 Total Basis of Allocation Factory rental Floor Area Power costs KWH hours Depreciation Cost of Plant/Equipment Building Insurance Floor Area Equipment Insurance Cost of Plant/Equipment