(15 marks) Question1 Namibia Fuels Limited (NFL) is a retail company in the oil
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(15 marks) Question1 Namibia Fuels Limited (NFL) is a retail company in the oil and gas industry. The company normally sells 36 750 barrels in normal trading year. The barrels cost N$12 000 each. The current ordering costs including freight per order is N$2 350. On the other hand the cost of keeping h barrel has been estimated by the finance director at N$120 per barrel. According to the available information on the stock card, NFL is currently purchasing 3 500 barrels per order. The company keeps average of 1 250 barrels to cover for emergencies should there be an unusual demand during a month. There has been doubt from the management as to whether the current ordering is the best for the company in terms of managing inventory costs 15 Requirement Assuming the company continues with the current reorder quantity as per inventory card what would be the total inventory costs? Should the management decide to use economic order quantity (EOQ) in their ordering system, how many deliveries will they expect to receive per year? Assuming the company has adopted the EOQ model, calculate the minimum nventory level they should keep At a recent meeting, the management of NFL has learnt that the company is losing money, in inventory costs. The managing director has proposed that the company may be able to save a lot of money if they reduce the minimum inventory level to below 500 barrels. The production and marketing managers have both suggested that instead of working towards reducing the minimum inventory level, the company 5 b) can instead adopt a just in time (UIT) system. However, currently there is no one in the company who is knowledgeable about how the JIT system works. Explain to d) them any three elements that ensures a successful implementation of a JIT systemExplanation / Answer
A. Case where company follows current re-order quantity
Calculation of total inventory costs
AMOUNT
$
AMOUNT
$
Purchase cost of inventory
[36750 barrels * 12000 $]
order cost of inventory
[36750 barrels / 3500 barrels per order * 350 $]
carrying cost of inventory
[1250 barrels *120$]
B. Use of EOQ in the inventory system
Economic order quantity can be beneficial as it can reduce excessive ordering cost and cost of holding the inventory
square root of ( 2* annual demand in units * ordering cost per unit / carrying cost per unit)
square root of (2* 36750 barrels * 0.10 $ per barrel / 120 $)
equals to 7.82 orders
* calculation of purchase cost per barrel
$ 350 per order / 3500 barrels per order = 0.10 $
presently company places 10.5 orders which reduces to 7.82 orders which leads to a savings of
938 $ ( 2.68 * 350 $)
C. calculation of minimum inventory level that should be kept if company opts EOQ model
For the ordering quantity of 10.5 orders the company keeps 1250 barrels as the reserve or re order quantity
therefore for the ordering quantity of 7.82 orders the minimum level of inventory is:
7.82 orders / 10.5 orders * 1250 barrels = 931 barrels
D. JIT SYSTEM
this is a method of recieving goods as and when requiered , this can in turn eliminate the holding cost or the carrying costof inventory , improve the cash flows and also iradicate dead stocks of inventory
three elements that ensure sucessfull implementation of the JIT system
PARTICULARSAMOUNT
$
AMOUNT
$
Purchase cost of inventory
[36750 barrels * 12000 $]
441,000,000order cost of inventory
[36750 barrels / 3500 barrels per order * 350 $]
3,675carrying cost of inventory
[1250 barrels *120$]
150,000 Total cost of inventory 441,153,675Related Questions
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