QUESTION 1 (CHAPTER 3) D Berhad wishes to improve its working capital management as part of an overall cost- cutting strategy to increase profitability. Two areas the company has been considering are working capital funding strategy and inventory management. D Berhad currently follows a policy of financing working capital needs as much as possible from long-term sources of finance, such as equity. The company has been considering its inventory management and has been looking specifically at component K. Current position D Berhad purchases 1,500,000 units of component K each year and consumes the component at a constant rate. The purchase price of component K is RM14 per unit. The company places 12 orders each year. Inventory of component K in the financial statements of D Berhad is equal to average inventory of component K. The holding cost of component K, excluding finance cost, is RM0.21 per unit per year. The ordering cost of component K is RM252 per order. Economic Order Quantity D Berhad wishes to investigate whether basing ordering component k on the economic order quantity will reduce cost. Bulk order discount The supplier of component Khas offered D Berhad a discount of 0.5% on the purchase price of component K, provided the company orders 250,000 units per order. Other information D Berhad has no cash but has access to short-term financing via an overdraft facility at an interest rate of 3% per year. This overdraft facility stands at RM550,000. QUESTION 1 (a) Annual holding and ordering costs of the current inventory management system (6 marks) Each current order is (1) Average inventory (1) Current holding cost (1) Current ordering cost (1) Current total inventory management cost (2) (b) Financial effect of adopting EOQ model (8 marks) EOQ (1) Number of orders (1) Average inventory (1) Holding cost (1) Ordering cost (1) EOQ total inventory management cost (1) Reduction in total inventory management cost (1) Reduction in average inventory (1) Comment (c) Financial effect of accepting the bulk order discount (12 marks) Number of orders (1) Average inventory (1) Holding cost (1) Ordering cost (1) Total inventory management cost (1) Increase in total inventory management cost (1) Increase in value of average inventory (1) The overdraft will increase by the same amount. Finance cost increase (1) Bulk order discount (1) Overall saving (3) + (d) Recommend, just justification, which option should be selected by D Berhad (4 marks)