Question 2

SIMTECH Ltd uses the economic order quantity (EOQ) model to establish the reorder quantity for raw material Z. The company holds no buffer inventory.

Information relating to raw material Z is as follows:

Annual usage	144,000 units
Purchase price	40 per unit
Order costs	80 per order
Annual holding costs	10% of the purchase price

Required:

1. Calculate:
   1. The EOQ for raw material Z.
   2. The total annual cost of purchasing, ordering and holding inventories of raw material Z.

The supplier has offered SIMTECH Ltd a discount of 1% on the purchase price if each order placed is for 6,000 units.

2. Calculate:
   1. The total annual cost of purchasing, ordering and holding inventories of raw material Z if SIMTECH Ltd accepts the offer of the discount.
   2. The total annual saving to SIMTECH Ltd of accepting this discount offer.