A company is reviewing its stock and has the following alternatives available for evaluating the optimal order size for item number 1287

A company is reviewing its stock and has the following alternatives available for evaluating the optimal order size for item number 1287
1. Purchase stock twice monthly, 100 units
2. Purchase monthly, 200 units
3. Purchase every three months, 600 units
4. Purchase every six months, 1,200 units
5. Purchase annually, 2,400 units

It is ascertained that the purchase price per unit is Sh.80 for deliveries up to 500 units. A 5% discount is offered by the supplier on the whole order where deliveries are 301 up to 1,000 and 10% reduction on the total order for deliveries in excess of 1,000. Each purchase order incurs administration costs of Sh.50. Storage, interest on capital and other costs are Sh.25 per unit of average stock quantity held.

Required: Advise management on the optimum order size

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Solution
Calculate the total costs for the option.
TC = purchases cost + orderly cost + holding cost
Optional 1


The optimum order is 1200 units every six months. The management should order from optional 4 because the total cost is lowest. The order of lowest to highest is: optional 4, 3, 2, 1 and 5

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Wilfykil answered the question on August 5, 2019 at 11:58

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