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MAC3701 EXAM PACK 2023
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MAC3701 EXAM PACK 2023
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MAC3701EXAM PACK
2023
, 1
THE MANAGEMENT OF STOCKS
Almost every company carries stocks of some sort, even if they are only stocks of consumables such as
stationery. For a manufacturing business, stocks (sometimes called inventories), in the form of raw
materials, work in progress and finished goods, may amount to a substantial proportion of the total assets of
the business.
Some businesses attempt to control stocks on a scientific basis by balancing the costs of stock shortages
against those of stock holding.
The ‘scientific’ control of stocks may be analysed into three parts.
- The economic order quantity (EOQ) model can be used to decide the optimum order size for stocks which
will minimise the cost of ordering stocks plus stockholding costs.
- If discounts for bulk purchases are available, it may be cheaper to buy stocks in large order sizes so as to
obtain the discounts.
- Uncertainty in the demand for stocks and/or the supply lead time may lea a company to decide to hold
buffer stocks (thereby increasing its investment in working capital) in order to reduce or eliminate the
risk of ‘stock-outs’ (running out of stock).
Stock costs
Stock costs can be conveniently classified into four groups:
- Holding costs comprise the cost of capital tied up, warehousing and handling costs, deterioration,
obsolescence, insurance and pilferage.
- Procuring costs depend on how the stock is obtained but will consist of ordering costs for goods
purchased externally, such as clerical cost, telephone charges and delivery costs.
- Shortage costs may be:
the loss of a sale and the contribution which could have been earned
from the sale;
the extra cost of having to buy an emergency supply of stocks at a high
price;
the cost of lost production and sales, where the stock-out brings an entire process to a halt.
- The cost of the stock itself, the supplier’s price or the direct cost per unit of production, will also need to
be considered when the supplier offers a discount on orders for purchases in bulk.
, 2
KEY ASSUMPTIONS OF THE EOQ MODEL
- demand is constant;
- the lead time is constant or zero;
- purchase costs per unit are constant (i.e. no bulk discounts).
- only applied to individual products
ILLUSTRATION
Demand : 3000 u. (P.a) Lead time : 2 weeks
Cost Price : R40/u Operate for : 50 weeks pa
Order cost : R300/order Safety stock : 1 week (60 units)
Holding cost : R15/u
(including opp cost)
No of orders
Re-order point
(Demand Per Time unit X lead time) + Safety stock
3000 60 units X 2 + 60
=
50
= 120 units + 60 = 180 units
, 3
Holding cost
347
+ 60 X R15
2
= R3502.50
DECSION MAKING
Assume that your supplier proposes that you order fewer times per year, lets say 4 times, and for this he
offers you a 5% discount. What would you do?
Proposal : 5% Discount if only 4 orders are placed during the year
New No. of units
3000 u
=750 units
4 orders
Current Proposed
Purchase Price
3000u X R40 120 000
3000u X R38 114 000
Order Cost
9 orders X R300 2 700
4 orders X R300 1 200
Holding Cost
347
+ 60 X 15 3 503
2
750
+ 60 X 15 6 525
2
126 203 121 725
Net Saving : R4 478
Accept Proposal
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