Calculate the economic order quantity, Operation Management

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The Managing Director of Beauty Soaps Ltd just visited a soap manufacturing firm in Malaysia and he was immensely impressed by its raw materials stock management System. He wanted his Operations manager to implement the just-in-time stock management system in his unit in order to eliminate all the costs associated with keeping stocks. For the Operations manager the local conditions are not conducive for the implementation of such a system. The main raw materials are sodium palmitate noodles, colour and perfume, imported from Malaysia. Wrappers and cartons are produced locally.

(a) Discuss the various costs associated with keeping costs.

(b) Discuss the conditions to be present in order to enable the successful implementation of just-in-time stock management system.

(c) A trader expects to sell about 300 units of a component per month. The storage space taken up by one unit of the product is estimated at Rs 30 per year. The cost associated with ordering is Rs 65 per order and interest rates are expected to be 10% per year. Each unit costs Rs 50.

(i) Calculate the economic order quantity ?
(ii) Calculate the total cost of the component for one year.
(iii) A supplier came up with an offer of supplying the same component at Rs 40 per unit, if the ordering quantity is 600 units per order. Should the trader accept the order?

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