Solved: Mr Evans is a wholesaler who buys and sells a

Mr Evans is a wholesaler who buys and sells a

Mr. Evans is a wholesaler who buys and sells a wide range of products, one of which is the
Laker. Mr. Evans sells 24 000 units of the Laker each year at a unit price of £20. Sales of the
Laker normally follow an even pattern throughout the year but to protect himself against
possible deviations Mr. Evans keeps a minimum stock of 1000 units. Further supplies of the
Laker are ordered whenever the stock falls to this minimum level and the time lag between
ordering and delivery is small enough to be ignored.

At present, Mr. Evans buys all his supplies of Lakers from May Ltd, and usually purchases them
in batches of 5000 units. His most recent invoice from May Ltd was as follows:

(£)

Basic price: 5000 Lakers at £15 per unit 75 000

Delivery charge: Transport at £0.50 per unit 2 500

Fixed shipment charge per order 1 000

78 500

In addition, Mr. Evans estimates that each order he places costs him £500, comprising
administrative costs and the cost of sample checks. This cost does not vary with the size of the
order.

Mr. Evans stores Lakers in a warehouse which he rents on a long lease for £5 per square foot
per annum. Warehouse space available exceeds current requirements and, as the lease cannot
be cancelled, spare capacity is sublet on annual contracts at £4 per square foot per annum.
Each unit of Laker in stock requires two square feet of space. Mr. Evans estimates that other
holding costs amount to £10 per Laker per annum.

Mr. Evans has recently learnt that another supplier of Lakers, Richardson Ltd, is willing, unlike
May Ltd, to offer discounts on large orders. Richardson Ltd sells Lakers at the following prices:

In other respects (i.e. delivery charges and the time between ordering and delivery) Richardson
Ltd's terms are identical to those of May Ltd.

(a) Calculate the optimal re-order quantity for Lakers and the associated annual profit Mr Evans
can expect from their purchase and sale, assuming that he continues to buy from May Ltd;

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 (b) Prepare calculations to show whether Mr. Evans should buy Lakers from Richardson Ltd
rather than from May Ltd and, if so, in what batch sizes;

(c) Explain the limitations of the methods of analysis you have used.

Mr Evans is a wholesaler who buys and sells a

ANSWER
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