PROBLEM # 1: ( 10 + 2 + 3 = 15 Marks )
Kahani Ghar, a local company, mainly deals in the business of children storybooks. The company observes a stable demand for the storybooks so it keeps on replenishing its inventory by placing order(s) for more storybooks from the publisher whenever there is an inventory shortage. The company is planning to buy 400,000 storybooks in the coming year for which it can place a single order or multiple orders as provided in the following table. Each order would cost Rs. 100 and the annual carrying cost of the inventory would be Rs. 0.50 per storybook. Average inventory over theyear would be half of the order size so the carrying costs would be calculated accordingly.
Required:
a) Fill in the following table by keeping above information into consideration.
b) Which order should be placed by Kahani Ghar according to the table and why?
c) Calculate Economic Order Quantity. Is your answer consistent with your findings in part (b)?
PROBLEM # 2: ( 4 + 1 = 5 Marks )
ABC Inc. mainly deals in selling goods on credit and the company’s average collection period is 40 days. The company is recently considering two options regarding its terms of credit. First option includes terms of 3/10 net 40 with an estimation that 60% of the customers will pay within 10 days whereas remaining will pay after 10 days. Second option includes terms of 3/15 net 40 days with an estimation that 40% of the customers will pay within 15 days whereas remaining will pay after 15
days.
Required:
a) What will be the average collection period of ABC Inc. in both options?
b) Which option is more suitable for the company (ignoring the cost of discounts) and why?
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