KASBIT Introduction to Business Finance Exercise # 12

Q1: Inventory Management – Determination of Order Quantity

A business buys DELTAS, puts them through a finishing process and then sells them. At the
beginning of the June the store manager realizes that there are only 35 DELTAS in inventory
and wants to know how many he will need to order in each of the next three months. He ascertain
that planned sales for the next three months and planned closing inventories are as follows:

Details June July August

Sales 120 150 130
Closing Inventories 60 70 50

Require: Calculate number of DELTAS to be order in each of the above three months.

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KASBIT Introduction to Business Finance Exercise # 12

Q2: Inventory Management – Determination of Order Quantity

XYZ Co. produces three products X, Y and Z. for the coming accounting period the following
sales, usage and inventories are planned:

Sales:
Product X: 2000 units at $100 each
Product Y: 4,000 units at 130 each
Product Z: 3,000 units at 150 each.

Usage of Raw Materials (Units of Material per unit of Product)

Details RM11 RM22 RM33
Product X 5 2 Nil
Product Y 3 2 2
Product Z 2 1 3
Cost per unit of Materials $5 $3 $4

Finished Goods Inventory

Details Product X Product Y Product Z
Opening Inventory 500 800 700
Closing Inventory 600 1,000 800

Raw Materials Inventory

Details RM11 RM22 RM33
Opening Inventory 21,000 10,000 16,000
Closing Inventory 18,000 9,000 12,000

Require: Calculate the amount of raw material purchased for each of the product.

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KASBIT Introduction to Business Finance Exercise # 12

Q3: Inventory Valuation – Periodic Method

Following transactions were completed by ANU Ltd during the first quarter of 2020.
Date Transactions
Jan -01 Opening inventory 100 units @ 90 each.
Jan- 15 Purchased 200 units @ Rs. 100 each.
Jan – 30 Purchased 300 units @ Rs. 110 each.
Feb – 10 Sold 400 units @ Rs. 130 each
Feb -20 Purchased 300 units @ Rs. 120 each
Mar -16 Purchased 200 units @ Rs. 130
Mar – 25 Sold 400 units @ Rs. 150 each.

Required:
a) Prepare inventory valuation card under periodic method.
b) Compute Cost of Ending Inventory & Cost of goods sold under FIFO – Periodic Method.
c) Compute Cost of Ending Inventory & Cost of goods sold under LIFO – Periodic Method.
d) Compute cost of Ending Inventory & Cost of goods sold under WAVCO – Periodic Method.
e) Prepare condensed Income Statement for the quarter ended March 31, 2020.

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KASBIT Introduction to Business Finance Exercise # 12

Q4: Economic Order Quantity

The demand for a commodity is 40,000 units a year, at a steady rate. It costs $20 to place an
order, and 40c to hold a unit for a year.

Required:
f) Find the order size to minimize the inventory cost. Ans. [2,000 units]
g) Find the number of order placed each year. Ans. [20 orders]
h) Find the length of inventory cycle. Ans. [2.6 weeks]
i) Find the total cost of holding inventory for the year. Ans. [$800 a year]

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KASBIT Introduction to Business Finance Exercise # 12

Q5: Maximum & Buffer Safety Inventory

A company has an inventory management policy which involves ordering 50,000 units when
inventory level falls to 15,000 units. Forecast demand to meet production requirements during
the next year is 310,000 units. You should assume a 50-week year and that demand is constant
throughout the year. Orders are received two weeks after being placed with the supplier.

Required:
a) Calculate average usage per week. Ans. [6,200 units]
b) Calculate average lead time? Ans. [ 2 weeks]
c) What is a re-order level? Ans. [15,000 units]
d) Calculate buffer safety inventory Ans. [2,600 units]
e) Calculate Average Inventory? Ans. [ 27,600 units]

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KASBIT Introduction to Business Finance Exercise # 12

Q6: Inventory Valuation – Periodic Method

Following transactions were completed by ANU Ltd during the first quarter of 2020.
No. Transactions No. Transactions
1 Opening inventory 1000 units @ 15 each. 5 Purchased: 2000 units @ 22 each
2 Purchased: 1500 units @ 18 each 6 Sold:1500 units @ 30 each
3 Sold: 1600 units @ 25 each 7 Purchased:1000 units @ 25 each
4 Sold 400 units @ Rs. 27 each 8 Sold:1500 units @ 30 each

Required:
a) Prepare inventory valuation card under periodic method.
b) Compute Cost of Ending Inventory & Cost of goods sold under FIFO – Periodic Method.
c) Compute Cost of Ending Inventory & Cost of goods sold under LIFO– Periodic Method.
d) Compute cost of Ending Inventory & Cost of goods sold under WAVCO – Periodic Method.
e) Prepare condensed Income Statement for the quarter ended March 31, 2020.

Farrukh Adeel Page 6