Whirlygig plc manufactures and markets automatic dishwashing machines. Among the components which it purchases each year from external suppliers for assembly into the finished article are window units, of which it uses 20 000 units per annum.
It is considering buying in larger amounts in order to claim quantity discounts. This will lower the number of orders placed but raise the administrative and other costs of placing and receiving orders. Details of actual and expected ordering and carrying costs are given in the table below:

To implement the new arrangements will require reorganization costs estimated at £10 000 which can be wholly claimed as a business expense for tax purposes in the tax year before the system comes into operation. The rate of corporate tax is 33 per cent, payable with a one-year delay.
(a) Determine the change in the economic order quantity (EOQ) caused by the new system.
(b) Calculate the payback period for the proposal and comment on your results.

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Actual Propose o P £31.25 £120 £6.25 E6.00 Ordering cost per order Purchase price per item (annual) Inventory holding cost (as a percentage of the purchase price) 20% 20%