Question

Question1 (27 Marks) Mazembezi runs a small business as a manufacturer based in Katimo Mulilo. The company needs some advice om you as an Assistant Management Accountant. You are presented with the following information: It takes Mazembezi two to four months to receive the raw materials from their suppliers. The organization uses a maximum of 300 units per month at most, and a minimum of 5 units per day. At least 50 units should always remain in the warehouse at all times. It costs them N$8.00 each time they make an order and pay N$5 per unit of material. The Organisation rent a warehouse for which they are charged a 10% on inventory value per annum The opportunity cost lost for not investing the money in a financial institution is 10%The organization operates on a 12 months calendar year (360 days per year). Assume there are 30 days in each month. Required 1.1Calculate the reorder point 1.2 Calculate the economic order quantity 1.3 What would be the average inventory? 1.4 What would be the maximum inventory? 1.5 How many orders will be placed in a year? 1.6 How much will it cost to keep inventory in the warehouse? 1.7 How much will it cost to place all orders in a year? 1.8 What would be the cost of purchasing the inventory for the year? 1.9 Explain what Non-linear variable cost is? 1. 10 Explain what is period cost and Step fixed cost (2 Marks) (3 Marks) (2 Marks) (2 Marks) (2 Marks) (2 Marks) (2 Marks) (3 Marks) (3 Marks) (6 Marks)

Answer 1

Given in the question Minimum Delivery Period Maximum delivery Maximum Usage per month Minimum usage per month (5 Per Day 30)- 150 Units 150 Units Minimum Level 2 Months 4 Months 3oo Units Period 50 Units Ordering Cost Unit Cost Storage Cost $8 $5 10% PA 10% PA rtunity cost 1) Reorder Point - Maximum Usage per month * Maximum Delivery Period 300 Units 4 Months 1200 Units 2) Economic Order Quantity (2A0/C)"(1/2) Where:- A Annual Demand We have - Reorder Level-Minimum Level (Average rate of consumption *Avearge time to obtain supplies) 1200 50+ (A/12)*(4+2)/2] -A=4600 O = Ordering cost C Carrying cosft Alternatively the value ofA can be derived as follows and question may be done accordingly A -Annual Demand (300+150)/2 12 Months C = Price Per Unit" (Storage cost-opportunity cost s* (10+10)96 1.0O EOQ (2* 460o 8/ 1)*(1/2) Taking 4600 or 272 - 271.2931

3) Average stock Minimum Level + 1/2 reorder quantity 50+1/2 +272 186 4) Maximum Inventory -Reorder Level + Reorder Quantity - (Min. Consumption * Mmin. Delivery time) 1200 + 272 (150 + 2) 1172 = *As per the policies rest of the questions need not to be answered.