• The purchasing manager of Tembo Tamu Limited, a wine retailer store holds a regular stock of among other things, “Jayden” a bottle of wine. Over the past year, he has sold, on average, 25 bottles of Jayden a week and he anticipates that this rate of sale will continue during the next year (which you may take to be 50 weeks). He buys the Jayden from his supplier at the rate of $5 for 10, and every time he places an order it costs on average $10 bearing in mind the necessary secretarial expenses and the time involved in checking the order. As a guide to the stockholding costs involved, the company usually values its cost of capital at 20% and as the storage space required is negligible, he decides that his figure is appropriate in this case. Furthermore, the prices charged to customers are determined by taking the purchasing and stockholding costs and applying a standard markup to 20%.
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• a) Currently the manager is reviewing his ordering and pricing policies and needs to know how many bottles of Jayden he should order each time and what price he should charge. What would be your advice? (State any assumptions that you make). [10 Marks]
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• b) If he now finds out that he can get a discount of 5% for ordering in batches of 1,000 would you advise him to amend the ordering and pricing policy that you have suggested and, if so, to what level? [7Marks]
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• c) How large would the percentage holding cost have to be, for the manager to be indifferent between taking advantage of the quantity discount and maintaining the original ordering policy that you have suggested? Comment on the value that you have obtained. [8 Marks]
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Answer rating: 100% (QA)

1 The manager should order 25 bottles of Jayden at a time and charge 12 per bottle Assuming that the manager wants to maintain a constant stock level ... View the full answer