Question: PoMA Ltd uses the Economic Order Quantity Model to determine order quantities. The following information is given for the next year: Order costs 20 per

PoMA Ltd uses the Economic Order Quantity Model to determine order quantities. The following information is given for the next year:

Order costs 20 per order

Delivery costs 5 per order

Holding costs 10% of purchase price per annum

Annual demand 23,000 units

Purchase price 40 per unit

No safety stocks are held.

a. What is the EOQ? (2 Marks)

b. What are the total annual costs of stock if the company uses EOQ to determine quantity ordered every time (i.e. the total purchase cost plus total ordering cost plus total holding cost)? (4 Marks)

c. A supplier has offered a 1% reduction in the purchase price if a minimum of 1000 units are ordered per order. Compute the total annual cost if PoMA decided to avail this option. What saving or incremental cost would this result in for PoMA Ltd compared to ordering the EOQ? (5 Marks)

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