Solutions:

1. (a). Economic Order Quantity (EOQ) = √(2×A×O)/C

A = Annual demand in units

O = Cost incurred to place a single order

C = Carrying cost per unit per year

 EOC = √(2×1000×10)/0.50
=√ (20000)/0.50
=√40000
=200

Source: S.Chand (2015)

According to (Kumar, 2016) the EOQ is a model that is used to calculate the optimal quantity
that can be purchased to minimize the cost of both the carrying inventory and the processing of
purchase orders. It can be a valuable tool for small business owners who need to make decisions
about how much inventory to keep on hand, how many items to order each time, and how often
to reorder to incur the lowest possible costs. There are two most important categories of
inventory costs are ordering costs and carrying costs.
(b). Expected Number of Orders
=Annual Demand in Units/EOQ
A=Annual Demand in Units
EOQ= Economic Order Quantity
 Expected Number of Orders =A/EOQ
=1000/200
=50 units
(c). Daily Demand
Annual Demand (A)
Operational Days=200 Days
 Daily Demand
=Annual Demand/Operational Days
=1000/200
=5 units/day

(d). Total Annual Cost

=Total Ordering Cost + Total Carrying Cost
=√ (2×A×O×C)
=√ (2×1000×10×0.50)
=√ (10000)
=K100

According to (Singh, 2011), by using this model, the companies can minimize the costs
associated with the ordering and inventory holding. It can be a valuable tool for small business
owners who need to make decisions about how much inventory to keep on hand, how many
items to order each time, and how often to reorder to incur the lowest possible costs. There are
two most important categories of inventory costs are ordering costs and carrying costs.
Ordering costs:

It is the costs that are incurred on obtaining additional inventories. They include costs incurred
on communicating the order, traveling allowance and daily allowance to purchase officers,
printing and stationary, salary of purchase department, cost of inspection, cost of receiving the
material, transportation cost etc. all above cost, other than transport costs remain unchanged per
order irrespective of the order size.

Therefore, it is assumed that ordering cost per order remain constant. The more frequently orders
are placed, and fewer the quantities purchased on each order, the grater will be ordering cost and
vice versa (Farid, 2014).

Carrying cost:

It is the cost incurred for holding inventory in hand. They include interest on the money locked
up in stocks, storage costs, deterioration spoilage costs, insurance, evaporation, go down rent,
pilferage, shrinkage, obsolescence, other overhead of stores department etc. They are assumed to
be constant per unit of inventory. The large the volume of inventory, the higher will be the
inventory carrying cost and vice versa(Chen, 2011).

From the above discussion it is clear that ordering costs and carrying costs are quite opposite to
each other. If we need to minimize carrying costs we have to place small order which increases
the ordering costs. If we want minimize our ordering costs we have to place few orders in a year
and this requires placing large orders which in turn increases the total carrying costs for the
period. We need to minimize the total inventory costs, Thus EOQ is determine by the
intersection of ordering cost curve and carrying cost line. At this point total ordering cost is equal
to total carrying cost, and the total of the two costs is the least(Matthew, 2013).

2(a). Importance of Productivity for Competitive Advantage:

Productivity is commonly defined as a ratio between the output volume and the volume of
inputs. In other words, it measures how efficiently production inputs, such as labour and capital,
are being used in an economy to produce a given level of output.

There are many different definitions of productivity (including those that are not defined as ratios
of output to input) and the choice among them depends on the purpose of the productivity
measurement and/or data availability. The key source of difference between various productivity
measures is also usually related (directly or indirectly) to how the outputs and the inputs are
aggregated into scalars to obtain such a ratio-type measure of productivity. Types of production
are mass production and batch production(Chen, 2011).

Productivity is a crucial factor in production performance of firms and nations. Increasing

national productivity can raise living standards because more real income improves people's
ability to purchase goods and services, enjoy leisure, improve housing and education and
contribute to social and environmental programs.

A competitive advantage is an attribute that enables a company to outperform its competitors.

Competitive advantage refers to factors that allow a company to produce goods or services better
or more cheaply than its rivals. These factors allow the productive entity to generate more sales
or superior margins compared to its market rivals.

Competitive advantages are attributed to a variety of factors including cost structure, branding,
and the quality of product offerings, the distribution network, intellectual property, and customer
service (Matthew, 2013).

Competitive advantages generate greater value for a firm and its shareholders because of certain
strengths or conditions. The more sustainable the competitive advantage, the more difficult it is
for competitors to neutralize the advantage. The two main types of competitive advantages are
comparative advantage and differential advantage(Goyal, 1985).

Comparative Advantage

A firm's ability to produce a good or service more efficiently than its competitors, which leads to
greater profit margins, creates a comparative advantage. Rational consumers will choose the
cheaper of any two perfect substitutes offered. For example, a car owner will buy gasoline from a
gas station that is 5 cents cheaper than other stations in the area. For imperfect substitutes, like
Pepsi versus Coke, higher margins for the lowest-cost producers can eventually bring superior
returns(Chand, 2015), .
Economies of scale, efficient internal systems, and geographic location can also create a
comparative advantage. Comparative advantage does not imply a better product or service,
though. It only shows the firm can offer a product or service of the same value at a lower price.

Differential Advantage:

A differential advantage is when a firm's products or services differ from its competitors'
offerings and are seen as superior. Advanced technology, patent-protected products or processes,
superior personnel, and strong brand identity are all drivers of differential advantage. These
factors support wide margins and large market shares(Chand, 2015).

(b). Labor productivity is simply the ratio of loans to labor-hours:

Output (Loans)
Input (Labor Hrs)

=3 officers x 5 loans/day = 0.625 loans/labour hrs

3 officers x 8 hrs. /day

 Multifactor productivity accounts for both labor cost and overhead:

Output (Loans)
Input (Labor cost + Overhead)

=3 officers x 5 loans/day = 0.0113 loans/K

K820+K500
The new software increases the number of loans processed per day, but it also increases the
overhead.
New Labor Productivity: Output (Loans)
Input (Labor Hrs)

=3 officers x 8 loans/day = 1.0 loans/labour hrs

3 officers x 8 hrs. /day

 New Multifactor productivity: Output (Loans)

Input (Labor cost + Overhead)

=3 officers x 8 loans/day = 0.0175 loans/K

K820+K550
Purchasing the new software would increase the labor productivity by 60 percent
(=[1.0−0.625]/0.625) and would increase the multifactor productivity by 55 percent (= [0.0175
−0.0113]/0.0113), so it is certainly worth the added overhead.

REFERENCES

S. K. Goyal, Economic Order Quantity under Conditions of Permissible Delay in Payments, The
Journal of the Operational Research Society, Vol. 36, No. 4 (Apr., 1985), pp. 335-338.

Aju Mathew, Demand Forecasting For Economic Order Quantity in Inventory Management,
International Journal of Scientific and Research Publications, Volume 3, Issue 10, October 2013.

Tien-Yu Lin and Ming-Te Chen, An economic order quantity model with screening errors,
returned cost, and shortages under quantity discounts, African Journal of Business Management
Vol. 5(4), pp. 1129-1135, 18 February, 2011.

Milad Elyasi, Farid Khoshalhan and Mohammad Khanmirzaee, International Journal of

Industrial Engineering Computations , Volume 5 Issue 2 pp. 211- 222 , 2014.

Sarbjit Singh, An Economic Order Quantity Model for Items Having Linear Demand under
Inflation and Permissible Delay, International Journal of Computer Applications (0975 – 8887)
Volume 33– No.9, November 2011.

Dr. Rakesh Kumar. 2016. Economic Order Quantity (EOQ) Model. Global Journal of Finance
and Economic Management. Volume 5, Number 1 (2016), pp. 1-5 Research India Publications.

S. Chand. 2015. Operations Research, New Delhi: S.Chand Group