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Calculate the total cost of the current ordering policy

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The current policy is to order 100,000 units when the inventory level falls to 35,000 units. However, forecast demand to meet market requirements for next year is 625,000 units. The cost of placing and processing an order is R250, while the annual cost of holding a unit in stores is 5% of the unit purchase price. Both costs are expected to be constant during the next year. Shop n Pay sells a unit of the product for R15.00 at cost plus 50%. Orders are received two weeks after being placed with the supplier. You should assume a 350-day year and that demand is constant throughout the year.

1. Calculate the economic order quantity (EOQ).

2. Calculate the total cost of the current ordering policy and determine the savings that could be made should Shop n Pay switch to using the economic order quantity model.

Reference no: EM132626878

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