A-AS Level (CIE) Business Studies Paper-2: Specimen Questions with Answers 15 - 16 of 52

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Case Study-7

A company՚s requirement for ten days are 6,300 units. The ordering cost per order is $ 10 and the carrying cost per unit is $ 0.26. The following is the dis-countable schedule applicable to the company.

The Following is the Discountable Schedule Applicable to the Company
No. of orders12345678910
Order in size630031502100157512601050900787.5700630
Av. inventory315015751050787.5630525450393.7350315
Carrying cost8194102732051641371171029182
Order cost102030405060708090100
Total cost829430303245214297187182181182
Less: discount31518995956363----
Total cost after discount514241208150151234187182181182
The Following is the Discountable Schedule Applicable to the Company
Lot SizeDiscount per unit ($)
1 - 999

1000 - 1499

1500 - 2499

2500 - 4999

5000-and above






Question 15 (3 of 5 Based on Passage)


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Short Answer▾

Why should inventory be held?


In a firm both excessive and inadequate inventories are not required. These two are the danger points which must be avoided by the firm. The inventory management determines the optimum level of inventory to maintained and determine the level of inventory. The optimum level of inventory falls between these two levels i.e.. Excessive and inadequate. Firm should avoid over and under investment in inventories.

  • unnecessary blockage of the firm՚s funds and loss of profit,
  • high carrying costs
  • risk of liquidity.

The excessive level of inventory consumes funds of the firm, which then cannot be used for any other purpose, and thus, it involves an opportunity cost. The carrying costs, such as the costs handling, insurance, storage, inspection and reordering also increase the proportion of inventory to the volume.

Question 16 (4 of 5 Based on Passage)


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Short Answer▾

At which quantity should the company place order?


The use of the EOQ approach can be extended to production runs to determine the optimum size of manufacturer. Two cost involved are set-up costs and carrying cost. Set-up cost include costs on the following activities: preparing and processing the stock orders, preparing drawings and specifications, tooling machines set-up, handling machines, tools, equipment՚s, and materials over time. The economic production size will be one where the total of set-up and the carrying cost is minimum. When the quantity discounts are available, the company should place four order of 1575 units each as the total cost is minimum $ 150.

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