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Problem 1.6 (Incremental cost of processing an order). The annual demand for raw material Ris 4,000 units and the purchase price is expected to be Rs. 90 per unit. The incremental cost of processing an order is Rs. 135 and the cost of storage is estimated to be Rs. 12 per unit. (a) What is the optimal order quantity and the total relevant cost of this order quantity? (b) Suppose that Rs. 135 estimate of the incremental cost of processing an order is incorrect and should have been Rs. 80. Assume that all the other estimates are correct. What the cost of this prediction error assuming that the solution to part (a) is implemented for one year? (c) Assume at the start of the period, a supplier offers 4,000 units at a price of Rs. 86. The materials will be delivered immediately and placed in the stores. Assume that the incremental cost of placing this order is zero and the original estimate of Rs. 135 for placing an order for the economic batch size is correct. Should the order be accepted? (d) Prepare a Performance Report for the Supply Manager the budget is based on the data presented in (a) above and his actual performance was based on (c) above and he accepted the order