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Discuss four costs and risks associated with holding minimal inventory. Calculate the total annual demand (D) given varying monthly demands for 4 and 8 month periods.

Business/Management

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Question 3

3.1
Here are four costs and risks of holding little inventory:

  • Lost Sales/Stockouts: If demand unexpectedly increases or there are supply chain disruptions, a company with low inventory may run out of stock, leading to missed sales opportunities and customer dissatisfaction.
  • Production Delays: Insufficient inventory of raw materials or components can halt production lines, causing costly delays, idle labor, and failure to meet production targets.
  • Higher Ordering Costs: Ordering smaller quantities more frequently to maintain low inventory levels typically results in higher total ordering costs, as each order incurs administrative, processing, and transportation expenses.
  • Loss of Quantity Discounts: Suppliers often offer price reductions for larger bulk orders. Companies holding little inventory miss out on these quantity discounts, leading to higher per-unit purchasing costs.

3.2

  1. Calculate the total annual demand (D).

    Annual demand for the first 4 months: 5250 units/month×4 months=21000 units5250 \text{ units/month} \times 4 \text{ months} = 21000 \text{ units}
    Annual demand for the remaining 8 months: 3625 units/month×8 months=29000 units3625 \text{ units/month} \times 8 \text{ months} = 29000 \text{ units}
    Total Annual Demand (D) = 21000 units+29000 units=50000 units21000 \text{ units} + 29000 \text{ units} = 50000 \text{ units}

  2. Identify the carrying cost per unit (H) and cost per order (S).

    Carrying cost per unit (H) = R2 per year
    Cost per order (S) = R1,000

  3. Apply the Economic Order Quantity (EOQ) formula.

    EOQ=2DSH\text{EOQ} = \sqrt{\frac{2DS}{H}} EOQ=2×50000×10002\text{EOQ} = \sqrt{\frac{2 \times 50000 \times 1000}{2}} EOQ=50000000\text{EOQ} = \sqrt{50000000} EOQ≈7071.07\text{EOQ} \approx 7071.07

    The EOQ should be a whole number of units.

    EOQ=7071 units\text{EOQ} = \boxed{\text{7071 units}}

    3.3
    Here are three factors that may influence the ability of an enterprise to secure adequate financing:

    • Creditworthiness and Financial Health: Lenders and investors assess a company's financial statements, credit history, profitability, and cash flow to determine its ability to repay debt or generate returns. A strong financial position increases confidence and access to financing.
    • Business Plan and Viability: A clear, well-researched business plan demonstrating market potential, competitive advantage, and realistic financial projections is crucial. It assures financiers that the enterprise has a viable strategy for growth and profitability.
    • Collateral and Guarantees: The availability of assets (like property, equipment, or inventory) that can be pledged as collateral significantly reduces the risk for lenders. Personal guarantees from owners can also provide additional security, making it easier to obtain loans.

    3.4.1

  4. Calculate Current Liabilities (CL) for each company.

    Current Liabilities = Total Liabilities - Non-Current Liabilities

    For Company A:

    CLA=R75231−R45232=R29999\text{CL}_{\text{A}} = \text{R}75231 - \text{R}45232 = \text{R}29999

    For Company B:

    CLB=R85010−R34142=R50868\text{CL}_{\text{B}} = \text{R}85010 - \text{R}34142 = \text{R}50868

    For Company C:

    CLC=R95010−R53434=R41576\text{CL}_{\text{C}} = \text{R}95010 - \text{R}53434 = \text{R}41576

  5. Calculate the Current Ratio for each company.

    Current Ratio = Current Assets / Current Liabilities

    For Company A:

    Current RatioA=R95123R29999≈3.17\text{Current Ratio}_{\text{A}} = \frac{\text{R}95123}{\text{R}29999} \approx 3.17

    For Company B:

    Current RatioB=R102343R50868≈2.01\text{Current Ratio}_{\text{B}} = \frac{\text{R}102343}{\text{R}50868} \approx 2.01

    For Company C:

    Current RatioC=R152342R41576≈3.66\text{Current Ratio}_{\text{C}} = \frac{\text{R}152342}{\text{R}41576} \approx 3.66

    The current ratios are:
    Company A: 3.17\boxed{\text{3.17}}
    Company B: 2.01\boxed{\text{2.01}}
    Company C: 3.66\boxed{\text{3.66}}

    3.4.2

  6. Calculate the Acid Test Ratio (Quick Ratio) for each company.

    Acid Test Ratio = (Current Assets - Inventories) / Current Liabilities

    For Company A:

    Acid Test RatioA=R95123−R5412R29999=R89711R29999≈2.99\text{Acid Test Ratio}_{\text{A}} = \frac{\text{R}95123 - \text{R}5412}{\text{R}29999} = \frac{\text{R}89711}{\text{R}29999} \approx 2.99

    For Company B:

    Acid Test RatioB=R102343−R6454R50868=R95889R50868≈1.88\text{Acid Test Ratio}_{\text{B}} = \frac{\text{R}102343 - \text{R}6454}{\text{R}50868} = \frac{\text{R}95889}{\text{R}50868} \approx 1.88

    For Company C:

    Acid Test RatioC=R152342−R10343R41576=R141999R41576≈3.42\text{Acid Test Ratio}_{\text{C}} = \frac{\text{R}152342 - \text{R}10343}{\text{R}41576} = \frac{\text{R}141999}{\text{R}41576} \approx 3.42

    The acid test ratios are:
    Company A: 2.99\boxed{\text{2.99}}
    Company B: 1.88\boxed{\text{1.88}}
    Company C: 3.42\boxed{\text{3.42}}

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