Reed Juices Limited purchases 25,000 litres of a material each year from a single supplier. At...

Transcribed Image Text:

Reed Juices Limited purchases 25,000 litres of a material each year from a single supplier. At the moment, the company obtains the material in batch sizes of 800 litres. The material costs $16 per litre, the cost of ordering a new batch from the supplier is $32 and the cost of holding one litre in stock, due to certain technical difficulties, is $4 per annum plus an interest cost equal to 15% of the purchase price of the material. The supplier has agreed to offer a discount on orders above a certain size. He has offered the following price structure: Order size (litres) 0 - 499 500 - 999 1,000 plus Unit cost (S) 16.00 15.20 14.80 Required: (a) Prior to considering discounts: calculate the economic order quantity and the annual savings that will be obtained if the EOQ replaced the current lot size. (b) The supplier has offered quantity discounts based on the price structure indicated above, after considering discounts, how does this affect the optimal order quantity, and what would be the annual savings compared to the inventory costs with the EOQ you calculated in (a)? (c) At a recent meeting, Michael Wong, one of Reed's Ltd senior managers stated that the company should not use the EOQ model because it is based on unrealistic assumptions and no one in the company really understands how the model works. Draft a memo addressed to the company's managing director to respond to Mr. Wong's concerns. Reed Juices Limited purchases 25,000 litres of a material each year from a single supplier. At the moment, the company obtains the material in batch sizes of 800 litres. The material costs $16 per litre, the cost of ordering a new batch from the supplier is $32 and the cost of holding one litre in stock, due to certain technical difficulties, is $4 per annum plus an interest cost equal to 15% of the purchase price of the material. The supplier has agreed to offer a discount on orders above a certain size. He has offered the following price structure: Order size (litres) 0 - 499 500 - 999 1,000 plus Unit cost (S) 16.00 15.20 14.80 Required: (a) Prior to considering discounts: calculate the economic order quantity and the annual savings that will be obtained if the EOQ replaced the current lot size. (b) The supplier has offered quantity discounts based on the price structure indicated above, after considering discounts, how does this affect the optimal order quantity, and what would be the annual savings compared to the inventory costs with the EOQ you calculated in (a)? (c) At a recent meeting, Michael Wong, one of Reed's Ltd senior managers stated that the company should not use the EOQ model because it is based on unrealistic assumptions and no one in the company really understands how the model works. Draft a memo addressed to the company's managing director to respond to Mr. Wong's concerns.

Answer rating: 100% (QA)

Step 11 Reed Juices Limited purchases 25000 litres of a material each year from a single supplier At ... View the full answer