Bora Supermarket carries on its operation in Nakuru Town. On annual basis, it orders 480,000 pens from a Nairobi based distributor. A packet of twenty four pens delivered to Bora’s warehouse costs Sh.480 including transport charges. The supermarket borrows money from BCD Bank at an interest rate of 10% per annum to finance its inventories. The supermarket also incurs Sh.1,500 to place an order for the pens and Sh.8 carrying costs for each pen.

Required:

i) Economic order quantity (EOQ) for the pens.

ii) Total costs at the economic order quantity.

iii) For orders of 72,000 pens and above, the distributor has offered a discount rate of 10% on the delivery price .

Advise the management of the supermarket on whether to take advantage of the discount offer.

Answer rating: 100% (QA)

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