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: a) Calculate: i) the EOQ for raw material Z. ii) 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. b) Calculate: i) the total annual cost of purchasing, ordering and holding inventories of raw material Z if SIMTECH Ltd accepts the offer of the discount. ii) the total annual saving to SIMTECH Ltd of accepting this discount offer. [7 Marks]

c) Explain what is meant by holding costs and provide FOUR examples of holding costs. [4 Marks] d) Discuss why companies need to control inventory levels. [5 Marks]