KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN
ABMF2013 FUNDAMENTALS OF FINANCE
w TUTORIAL 11: INVENTORY MANAGEMENT
Question 1 (Tah yung)
The following information relates to Terjaya Sdn Bhd:
Sales = 137,000 units per annum
Unit price = RM2.40
Ordering cost per order = RM800
Carrying cost = 12% of unit price = 2.4 x 0.12 = RM 0.288
Calculate the following:
(i) Economic Order Quantity (EOQ);
(ii) Total inventory cost.
(i)
(ii)
Question 2 (Pei yee)
Win Win Sdn. Bhd. is a dealer in building products and has the following cost
associated with its business in year 2020;
Ordering cost（O) = RM250 per order
Carrying cost (C) = 20% per unit
Price per unit = RM1,500
Annual sales(S) = 500 units
Required:
a) Calculate:
(i) Economic order quantity
(ii) Number of orders per year
KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN
ABMF2013 FUNDAMENTALS OF FINANCE
(iii) Total inventory cost
b) If the carrying cost is expected to increase by 10% in year 2021 due to increase in
insurance cost, recalculate:
(i) Economic order quantity
(ii) Number of orders per year
(iii) Total inventory cost
(1500 x 0.2) 1.10 = RM330
KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN
ABMF2013 FUNDAMENTALS OF FINANCE
Question 3 (Zheng wei)
Pure Water Filter Sdn. Bhd is a dealer in building products. The following details relate
to one of its products, XYZ for the year ended 31 December 2021:
Sales 500 units
Purchase price RM100 per unit
Holding costs 25% of purchase price
Ordering cost RM250 per order
Required:
a) Calculate the EOQ
b) Determine the number of orders placed per year, based on your answer to (a)?
c) Calculate the total inventory cost
d) Due to an increase in the rental of warehouse space, the carrying cost is expected to
increase by 10%. Recalculate the EOQ and the number of orders placed per year
e) Explain why some firms keep safety stocks
KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN
ABMF2013 FUNDAMENTALS OF FINANCE
KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN
ABMF2013 FUNDAMENTALS OF FINANCE
e) Because the firm wants to avoid stock-out to keep customer service and satisfaction
levels high.
Question 4 (Teng ni lau)
A stationary shop sells various types of stationery. One of its products is ‘Pilot’ pen. The
shop sells 10,000 of the pens annually and the price per pen is RM10. The inventory
carrying costs are 20% of the unit price and the cost of placing an order with its supplier
is RM100.
The shop is using an outdated method of inventory control system. The manager wishes
to use modern technique to control the shop’s inventory. Therefore, the manager
recruited you to help them calculate the following:
a) What is the economic ordering quantity (EOQ)?
b) What is the total inventory cost for a year?
Question 5 (Shalini)
Despite the existence of the EOQ model which computes optimal order quantities, firms
sometimes do experience insufficient stock. This is because there are some
disadvantages in the EOQ model. Discuss these disadvantages.
There are several uncertainties that businesses face, one of them is the fluctuating
demand in the economy. The EOQ model formula becomes constant overtime but there
are chances that the demand for the product will increase or decrease. It needs constant
monitoring of the economic condition to be aware and predict the future demand.
Second is the variable inventory usage rate which always differs the cost in the long
term. This will be difficult for businesses since their main aim is to reduce the annual
inventory cost to drive their sales revenue. Business also needs to consider the fixed cost
product so if the inventory usage rate differs which will result in the business unable to
manage the overall product cost. Chances that the profits in the future will suffer.
KOLEJ UNIVERSITI TUNKU ABDUL RAHMAN
ABMF2013 FUNDAMENTALS OF FINANCE
Next will be the differing delivery time from suppliers. Sometimes suppliers might take
time to deliver due to orders from far destinations or bulky orders but most businesses
assume that they will receive the goods instanously which delays their process of
intermediary and reduces the availability of the product in the future or also known as
inventory shortage. This is because EOQ assumes instantaneous delivery from the
suppliers
