M/s Esha Materials Private Limited produces a product which names "ESS". The consumption of raw material for the production of "ESS” is 210 Kgs to…

(a) Calculation of Economic Order Quantity (EOQ) As procurement time is given in days, consumption should also be calculated in days: Maximum Consumption per Day: 350/7 = 50 Kgs Minimum Consumption per Day: 210/7 = 30 Kgs. Average Consumption per Day: (50+30)/2 = 40 Kgs Annual consumption of Raw Materials (A): 40 Kgs x 365 days = 14,600 Kgs Storage or Carrying Cost per unit per annum (C): (₹100 x 1% x 12 months) + ₹2 = ₹14 Ordering Cost (O): ₹200 per Order EOQ = √(2 x A x O / C) = √(2 x 14,600 x 200 / 14) = 646 Kgs. (b) Re-Order Level (ROL) = (Maximum consumption Rate × Maximum Procurement Time) = 50 kgs per day × 9 days = 450 kgs (c) Maximum Stock Level = Recorder Level + Recorder Quantity – (Minimum Consumption Rate X Minimum Procurement Time) = 450 kgs + 646 kgs - (30 kgs x 5 days) = 946 kgs (d) Minimum Stock Level = Recorder Level – (Average consumption Rate × Average Procurement Time) = 450 kgs – (40 kgs X 7 days) = 170 kgs (e) Average Stock Level = (Maximum Stock Level + Minimum Stock Level) / 2 = (946 kgs + 170 kgs) / 2 = 558 kgs (f) Number of Orders to be placed per year = Annual Consumption of Raw Materials / EOQ = 14,600 kgs / 646 kgs = 22.60 Orders or 23 Orders (g) Total Inventory Cost Cost of Materials (A x Purchase Price) (14600 kgs x ₹100) = ₹14,60,000 Total Ordering Cost (No. of Orders x O) (23 Orders x 200) = ₹4,600 Total Carrying Cost (EOQ / 2 x C) (646 kgs / 2 x 14) = ₹4,522 Total Inventory Cost = ₹14,69,122 (h) If the supplier is willing to offer 1% discount on purchase of total annual quantity in two orders: Offer Price = ₹100 x 99% = ₹99 Revised Carrying Cost = (₹99 x 1% x 12 months) + ₹2 = ₹13.88 Revised Order Quantity = 14600 kgs / 2 Orders = 7300 kgs Total Inventory Cost at Offer Price Cost of Materials (A x Purchase Price) (14600 kgs x ₹99) = ₹14,45,400 Total Ordering Cost (No. of Orders x O) (2 Orders x 200) = ₹400 Total Carrying Cost (EOQ / 2 x C) (7300 kgs / 2 x ₹13.88) = ₹50,662 Total Inventory Cost = ₹14,96,462 Advice: As total inventory cost at offer price is ₹27,340 (14,96,462 - 14,69,122) higher, offer should not be accepted. (i) Counter-offer: Let Discount Rate = z% Counter-Offer Price = ₹100 - z% = ₹100 -z Revised Carrying Cost = [(100 – z) x 1% x 12 months] + ₹2 = ₹12 -0.12z + ₹2 = 14 -0.12z Total Inventory Cost at Counter-Offer Price Cost of Materials (A x Purchase Price) [14600 kgs x (₹100 - z)] = ₹14,60,000 – 14,600z Total Ordering Cost (No. of Orders x O) (2 Orders x 200) = ₹400 Total Carrying Cost (EOQ / 2 x C) [7300 kgs / 2 x (₹14 – 0.12z)] = 51,100 - 438z Total Inventory Cost = ₹15,11,500 – 15038z ₹14,69,122 = ₹15,11,500 – 15038z Or 15038z = 42,378 Or Z = 2.82 Therefore, discount should be at least 2.82% in offer price.