Assume X Ltd purchases a raw material from an outside supplier at cost of Shs 70 per unit. Assume total annual demand for the product is 9,000 units. Assume the holding cost is Shs 40 per unit and the ordering cost is Shs 50 per order. Assume a quantity discount of 3% of the purchase price is available for orders in excess of 1,000 units. Required:
a. Calculate the EOQ and the associated costs.
b.Calculate the total costs if the company purchased in batches of 1,000 units (N.B. It is not wise to buy in batches with more than 1,000 units because of the increase rate in carrying exceed the rate at which ordering costs decline).
c. Advise the management on the appropriate inventory policy.