Question

Question 3

a) List two costs associated with carrying inventory [2 Marks]

b) List two functions of an Inventory Control System. [2 Marks]

c) Explain one purpose of an Inventory Control System. [2 Marks]

d) Distinguish between the Single Period Inventory System and the Price Break Model. [4 Marks]

Answer 1

a) List two costs associated with carrying inventory:

1. Capital costs

Capital costs is the costs incurred for carrying inventory. As an example money spent on acquiring goods, interest paid on a purchase, interest lost when cash turns into inventory, as well as the opportunity cost of purchasing inventory. Usually capital cost makes up the largest portion of the total carrying cost.

2. Storage costs

Storage costs are the costs incurred to help keep your inventory safely organized in a particular place like your warehouse. It may be divided into two components: fixed costs and variable costs.

Fixed costs comprise rent or mortgage costs of the storage space, however variable costs are manpower costs, costs of handling materials and utilities expenses associated with the space.

b) List two functions of an Inventory Control System:

• To Develop Policies, Plans and Standards Required
• Effective Running of Stores
• Stock Control System
• To Ensure the Timely Availability
• Maintenance of Specified Inputs
• Protection of Inventories
• Pricing

c)  Explain one purpose of an Inventory Control System:

Effective Running of Stores:

This can comprise problems of layout, utilization of storage space, issuing and receiving procedures of items kept in stock.

d) Distinguish between the Single Period Inventory System and the Price Break Model:

A Single Period Inventory System is a business situation faced by organizations that order seasonal or one-time items. There is only one chance to meet the quantity right when ordering, as the product has no value after the time it is required.

A Price Break Model is a reduction in price, specially for bulk purchase. Long lines are offputting to clients and even a price break is frequently not enough to convince them to waste that much time.