# CMA Study Group

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## PART 2 WORKING CAPITAL INVENTORY QUESTION

• #### 1.  PART 2 WORKING CAPITAL INVENTORY QUESTION

Posted 09-26-2022 05:50 AM
Dear Friends,

I couldnt understand the solution. How can we find avarega annual inventory as 25 pounds?

regards

 An entity uses 400 lbs. of a rare isotope per year. The isotope costs \$500 per lb., but the supplier is offering a quantity discount of 2% for order sizes between 30 and 79 lbs. and a 6% discount for order sizes of 80 lbs. or more. The ordering costs are \$200. Carrying costs are \$100 per lb. of material and are not affected by the discounts. If the purchasing manager places eight orders of 50 lbs. each, the total cost of ordering and carrying inventory, including discounts lost, will be
Answer (C) is correct.The entity's annual ordering costs are \$1,600 (\$200 per order × 8 orders per year), and the annual carrying costs are \$2,500 (\$100 per pound × 25 pounds average inventory). Gross annual product purchase cost is \$200,000 (\$500 per pound × 400 pounds annual usage). Because the differential discount lost is 4% (6% – 2%), annual discounts lost equal \$8,000 (\$200,000 × 4%). If the purchasing manager places 8 orders of 50 pounds each, the entity's total cost can be calculated as follows:
Annual ordering costs
\$  1,600
Annual carrying costs
2,500
Annual discounts lost
8,000
Total cost
\$12,100

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TIMUCIN ONER
Director/Manager
ANTALYA
Turkey
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• #### 2.  RE: PART 2 WORKING CAPITAL INVENTORY QUESTION

Posted 09-27-2022 05:00 AM

Dear TIMUCIN ONER,

Your question is how we can find average annual inventory?

The total annual inventory cost is made up of the total annual carrying cost and the total annual ordering cost. The annual carrying cost is calculated by multiplying the carrying cost per unit times the average inventory level. For the purposes of this calculation, the average inventory is equal to the number of units per order divided by two.

So, in this scenario purchasing manager places order 50 lbs. pounds when we calculate annual carrying cost remember this formula we need to divide by two whatever number of quantities given in the question to get average inventory value.

Here Annual Carrying cost we need to calculate? = \$100 x     50 lbs.

2

100 x 25 = 2,500 Annual carrying cost

Thank you for your question  I hope you really understand this explanation is there any thing let me know.

Sumair Shaik

Accountant

Dubai

United Arab emirates

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• #### 3.  RE: PART 2 WORKING CAPITAL INVENTORY QUESTION

Posted 09-27-2022 12:14 PM
Thank you for your illuminative explanation Sumair.
BR

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TIMUCIN ONER
Director/Manager
ANTALYA
Turkey
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