Key points from ISA 200 (Overall objective of independent auditor and the conduct of an audit in accordance with ISAs).

Revision question on how to calculate economic order quantity and reorder level.



(a)    A company uses 15,000 units of stock item 6786 each year. The item has a purchase cost of Rs.4 per unit. The cost of placing an order for re-supply is Rs.220. The annual holding cost of one unit of the item is 10% of its purchase cost.
Required

  • What is the economic order quantity for item 6786, to the nearest unit?
  • What would be the effect of an increase in the annual holding cost per  Unit on (1) the EOQ and    total annual ordering costs?

(b)   Data relating to stores item 6787 are as follows.

Daily use:                                 300 units

Lead time for re-supply:         5 – 20 days

Reorder quantity:                   10,000 units



Required

What should be the reorder level for this stock item, to avoid the possibility of inventory-outs?

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