The total inventory cost for RMD will be as follows if they continue with their current policy of purchasing 600 cartons per month.
Total Ordering cost = $200 x 12month
Holding cost/Carton = 20% x $6 x 120
= $24 per annum per carton
Holding cost p.m = $2 per carton
Total Holding Cost =$2 x 600 cartons x 12 months
Total inventory cost = $2,400 + $14,400
If the RMD used the Economic Order Quantity Model;
Total Inventory Cost = (Q/2)*Ch + (D/Q)*Co
= (600/2) * $24 + (7,200/600) * $200
= $7,200 + $2400
Using EOQ, the total inventory costs will be as follows;
With 5% discount = (800/2) * $22.8 + (7,200/800) * $200
= $9,120 + $1,800
With 7.5% discount = (1200/2) * $22.2 + (7,200/1200) * $200
= $13,320 + $1,200
With 10% discount = (2000/2) * $21.6 + (7,200/2000) * $200
= $21,600 + $720
The cost of the stock after discounts will be as follows;
With 5% discount = $114 * 7200
With 7.5% discount = $111 * 7200
With 10% discount = $108 * 7200
RMD should evaluate the proposal on the basis of how it will help lower its inventory costs. If the proposal lowers inventory cost, RMD could decide to make larger orders that would supply the demand for several months and store it in the Riverina Meats cool rooms. In this way, it would cut down on the $200 it pays each time it places an order (Bhargava, 2011). RMD should evaluate this proposal with regards to purchasing its stock from MacDonald’s Meats and also from Kelley’s Meats with all the discount options that are available. A carton is held at RMD’s warehouse at $24 per year which translates to $2 per month and approximately $0.5 per week. Comparing this with Riverina’s rates, it is obvious that Riverina’s rates are high, but RMD cannot hold more 600 cartons and hence the consideration for extra storage space. In the event that RMD realizes that it would better off in terms of inventory cost without using the extra inventory proposed by Riverina Meats, then it should not take up the extra costs associated with storing inventory at Riverina Meats storage (Saxena, 2009).
The current business environment thrives on cutting costs and maximizing revenues. One of the ways that have been identified to cut costs is through an adoption of inventory control methodologies. These methodologies ensure that businesses do not hold on excessive inventory that would raise holding costs or result into some of the inventory products going bad before they are sold (Bhargava, 2011). Inventory methodology like the Just In Time, (JIT), ensures the business entities only receive an inventory when they are ready to use them. In this model, the organization does not keep inventory (Saxena, 2009). Inventory may come in the form of raw materials and leave immediately after it has been processed into finished products.
Bhargava, R. (2011). Essentials of inventory management. New Delhi: Cyber Tech Publications.
Saxena, R. (2009). Inventory management. New Delhi: Global India Publications.