Question 3 (15 marks)

The purchasing manager Jack Cruise, who is also Mrs Watson nephew, has a very relaxed approach to purchasing ingredients. Jack places orders every week for the same amount of ingredients. He finds that this way if he doesnt turn up to work there will still be a plentiful supply of raw materials. Jill has just started as Jacks assistant and believes that ordering could be done more efficiently. She has devised the following table to prove her point:

	Scenario
	1	2	3	4	5
Annual Demand	234,000	234,000	234,000	234,000	234,000
Cost per purchase order	$81.00	$81.00	$81.00	$81.00	$81.00
Carrying cost per package per year	$11.70	$11.70	$11.70	$11.70	$11.70
Quantity per purchase order	900	1,500	1,800	2,100	2,700
Number of purchase orders per year
Annual ordering costs
Annual carrying costs
Total annual inventory costs

Required:

1. Using Excel, complete the table. What is the economic order quantity (EOQ)? Comment on your results? (4 marks)
2. Prepare a graphical analysis of the EOQ decision. (3 marks)
3. STPL is about to introduce a Web-based ordering system for its customers that Jill estimates will reduce STPLs ordering costs to $49 per purchase order. Calculate the new EOQ and the new annual ordering and carrying costs. (4 marks)
4. Prepare a graphical analysis of the new EOQ decision and comment on the differences. (4 marks)