Question

The annual consumption of a material is 40,000 units. The purchase price per unit

is Rs. 40; ordering cost per order is Rs. 400 and carrying cost is 5% p.a. At

present, the concern has been following optimum purchasing policy. Now, the

supplier has offered a rate of Rs. 39.90 and Rs. 39.85 per unit for purchasing

5,000 units and 10,000 units at a time respectively. Should any offer be accepted?​

Answer 1

Explanation:

Annual demand is 20,000 units so the company will have to place 16 orders (= annual demand of 20,000 divided by order size of 1,265). Total ordering cost is hence $6,400 ($400 multiplied by 16). Average inventory held is 632.5 (=(0+1,265)/2) which means total annual carrying costs would be $6,325 (i.e. 632.5 × $10).