Purchasing and Financing 2024

Using the formula
If
The Marginal reduction in order cost = (Annual Use x Cost per Order) / Order Size 2
And
The Marginal carrying cost = Carrying Cost per Unit / 2
Then
The optimum order can be found by setting marginal reduction in order cost equal to the
marginal carrying cost and solving Q (The Optimal Order Size) giving us the formula:
Q =
2 x Annual Use x Cost per order
/ Carrying Cost per Unit
In this case
Q =
2 x 1800 x R20
/ 30
Q = 49
An optimum order size of 49 compares very well with the 50 we found when using the
table method but would pose the same practical challenges. In the workplace it would be
much better to use either the table or the formula to choose between several practical
options.
10. MAKE OR BUY DECISIONS
Students can graphically determine whether making or buying would be more cost
effective.
After the company has determined the type and quality of the components of its
products, it has to decide which of these parts shall be purchased through the supplying
markets and which to produce within the company itself. The decision will be taken by
assessing the cost of production on the one side and comparing it with the cost of
purchasing on the other side.
The cost of production consists of the cost that arise from fixed investment into the
required technology (depreciation, rental, maintenance) and the variable costs that occur
due to the consumption of the required raw materials.
The costs of purchasing are determined by the acquisition purchasing cost itself, the
ordering costs and the inventory carrying costs involved with the required part.
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