ExpertMedium2 marksMultiple Choice
ACCA · Question 16 · Working Capital Management
Section B - Case 1: AquaHarvest Ltd
Scenario: AquaHarvest Ltd is a commercial aquaculture firm. Annual demand for their specialized fish feed is 50,000 kg. The cost of placing an order is $200. The holding cost is $0.50 per kg per year. The supplier currently charges $10 per kg but has offered a 2% bulk discount if AquaHarvest orders in quantities of 15,000 kg or more. AquaHarvest's current working capital metrics are: Receivables $400k, Payables $300k, Revenue $4m, Purchases $2m.
Ignoring the bulk discount for a moment, what is the Economic Order Quantity (EOQ) for the fish feed?
Section B - Case 1: AquaHarvest Ltd
Scenario: AquaHarvest Ltd is a commercial aquaculture firm. Annual demand for their specialized fish feed is 50,000 kg. The cost of placing an order is $200. The holding cost is $0.50 per kg per year. The supplier currently charges $10 per kg but has offered a 2% bulk discount if AquaHarvest orders in quantities of 15,000 kg or more. AquaHarvest's current working capital metrics are: Receivables $400k, Payables $300k, Revenue $4m, Purchases $2m.
Ignoring the bulk discount for a moment, what is the Economic Order Quantity (EOQ) for the fish feed?
Answer options:
A.
4,472 kg
B.
6,325 kg
C.
10,000 kg
D.
15,000 kg
How to approach this question
Use the EOQ formula: square root of [(2 * Co * D) / Ch]. Co = 200, D = 50,000, Ch = 0.50.
Full Answer
B.6,325 kg✓ Correct
The Economic Order Quantity minimizes total inventory costs (ordering + holding).
Formula: $EOQ = \sqrt{\frac{2C_oD}{C_h}}$
$C_o = \$200$
$D = 50,000$
$C_h = \$0.50$
$EOQ = \sqrt{\frac{2 \times 200 \times 50,000}{0.50}} = \sqrt{\frac{20,000,000}{0.50}} = \sqrt{40,000,000} = 6,324.55$ kg.
Rounded to 6,325 kg.
Common mistakes
Forgetting to take the square root, or using the purchase price ($10) instead of the holding cost ($0.50) in the denominator.
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