Intermediate: Calculation of EOQ using tabulation and formula method A large local government authority places orders for various stationery items at quarterly intervals.

In respect of an item of stock coded A32, data are:

annual usage quantity 5000 boxes minimum order quantity 500 boxes cost per box £2 Usage of material is on a regular basis and on average, half of the amount purchased is held in inventory. The cost of storage is considered to be 25% of the inventory value. The average cost of placing an order is estimated at £12.5. The chief executive of the authority has asked you to review the present situation and to consider possible ways of effecting cost savings.

You are required to:

(a) tabulate the costs of storage and ordering item A32 for each level of orders from four to twelve placed per year;

(b) ascertain from the tabulation the number of orders which should be placed in a year to minimize these costs;

(c) produce a formula to calculate the order level which would minimize these costs — your answer should explain each constituent part of the formula and their relationships;

(d) give an example of the use of the formula to confirm the calculation in

(b) above;

(e) calculate the percentage saving on the annual cost which could be made by using the economic order quantity system;

(f) suggest two other approaches which could be introduced in order to reduce the present cost of storage and ordering of stationery.

(25 marks) CIMA Cost Accounting 2 LO1