Padini Corporation, a large manufacturer of T-shirt in Malaysia, uses large quantities of flesh-coloured cloth in its

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Question:

Padini Corporation, a large manufacturer of T-shirt in Malaysia, uses large quantities of flesh-coloured cloth in its production process. Throughout the year, the firm uses 1,250,000 square meters of this cloth amounting RM2,500,000. The fixed costs of placing and receiving an order are RM3,000, which includes a RM2,500 setup charge at the mill. The annual cost of carrying this inventory item is one fourth of the price. Padini maintains a 13,000-square-meter safety stock. The cloth supplier requires a 1-week lead time from order to delivery.

a) Calculate the Economic Order Quantity (EOQ) for Toy Zone.

b) At what inventory level should an order be placed to prevent having to draw on the safety stock?

c) What are the total inventory costs, including the costs of carrying the safety stock?

d) The cloth supplier agrees to pay the setup charge if Padini will purchase cloth in quantities of at least 130,000 square meters. Recommend whether Padini should take up the offer. Justify your recommendation.