Reference no: EM132864162

Question - Mlima Co expects annual demand for product X to be 255,380 units. Product X has a selling price of K19 per unit and is purchased for K11 per unit from a supplier, Kolora Co. Mlima places an order for 50,000 units of product X at regular intervals throughout the year. Because the demand for product X is to some degree uncertain, Mlima maintains a safety Page 11 of 12 (buffer) stock of product X which is sufficient to meet demand for 28 working days. The cost of placing an order is K25 and the storage cost for product X is 10 pence per unit per year. Mlima normally pays trade suppliers after 60 days but Kolora has offered a discount of 1% for cash settlement within 20 days. Mlima Co has a short-term cost of debt of 8% and uses a working year consisting of 365 days.

Required -

(a) Calculate the annual cost of the current ordering policy. Ignore financing costs in this part of the question.

(b) Calculate the annual saving if the economic order quantity model is used to determine an optimal ordering policy. Ignore financing costs in this part of the question.

(c) Determine whether the discount offered by the supplier is financially acceptable to Mlima Co.

(d) Critically discuss the limitations of the economic order quantity model as a way of managing stock.

(e) Discuss the advantages and disadvantages of using just-in-time stock management methods.