A-AS Level (CIE) Business Studies Paper-2: Specimen Questions with Answers 14 - 15 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

0

0.010

0.015

0.030

0.050

Question 14 (2 of 5 Based on Passage)

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Short Answer▾

When should a firm place order to replenish inventory?

Explanation

The inventory level at which the firm places order to replenish inventory is called the reorder point. It depends on-

  • The lead times
  • The usage rates

Under perfect certainty about the usage rate, and instantaneous delivery, reorder point will be equal to:

Question 15 (3 of 5 Based on Passage)

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Short Answer▾

Why should inventory be held?

Explanation

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.

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