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

0

0.010

0.015

0.030

0.050

Question 16 (4 of 5 Based on Passage)

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Essay▾

“The management of inventory must meet two opposing needs.” What are they? How is a balance brought between two opposing needs. ?

Explanation

Maintaining inventories involves tying up of the company՚s funds and incurrence of storage and handling costs. There are three general motives for holding inventories.

  • Transactions motive, which emphasizes the need to maintain inventories to facilitate smooth production and sales operations.
  • Precautionary motive, which necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors.
  • Speculative motive, which influences the decision to increase or reduce inventory levels to take advantage of price fluctuations.

A company should maintain proper stock of materials for a regular supply to the factory for production without any interruption. For a company it is always not possible to maintain raw materials. A gap exists between demand for raw materials and supply of the materials. Also, there exists uncertainty in procuring raw materials in time, on many occasions. The procurement of materials may be delayed because of factors such as strike, transport disruption or short supply.

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