Mossy Mowers Ltd, which produces lawn mowers, purchases 27,500 units of a rotor blade part each
year at a cost of $35 per unit. The company requires a 13% annual rate of return on investment. In
addition, other carrying costs (for insurance, materials handling, breakage and so on) are $9.50 per
unit per year. The relevant ordering cost per purchase order is $125.
1. Calculate Mossy Mowers’ EOQ for the rotor blade part.
2. Calculate Mossy Mowers’ annual relevant ordering costs for the EOQ calculated in
3. Calculate Mossy Mowers’ annual relevant carrying costs for the EOQ calculated in
4. Assume that demand is uniform throughout the year and known with certainty so that there
is no need for safety stocks. The purchase order lead time is one week. Calculate Mossy
Mowers’ reorder point for the rotor blade part.
5. What are the weaknesses of the EOQ model? Can you recommend any alternative ways of
Winner Ltd (“Winner”) produces medals for winners of major sporting events and other contests. Its
manufacturing plant has the capacity to produce 10,000 medals each month. Current production
and sales are 7,500 medals per month. The company normally charges $150 per medal.
Winner has just received a special one-time-only order for 2,500 medals at $100 per medal.
Accepting the special order would not affect the company’s regular business. Winner makes medals
for its existing customers in batch sizes of 50 medals (150 batches × 50 medals per batch = 7,500
medals). The special order requires Winner to make the medals in 25 batches of 100 each.
1. Should Winner accept this special order? Show your calculations.
2. Suppose plant capacity were only 9,000 medals instead of 10,000 medals each month. The
special order must either be taken in full or be rejected completely. Should Winner accept
the special order? Show your calculations.
3. As in requirement 1, assume that monthly capacity is 10,000 medals. Winner is concerned
that, if it accepts the special order, its existing customers will immediately demand a price
discount of $10 in the month in which the special order is being filled.
They would argue that Winner’s capacity costs are now being spread over more units and
that existing customers should get the benefit of these lower costs. Should Winner accept
the special order under these conditions? Show your calculations.
Julie is a stay-at-home mum who often finds herself looking after friend’s children as well as her
own. She often jokes that her house is like a day-care centre but sometimes it feels more like reality
and gives her an idea. Julie loves children, but is also impatient to get back into the ranks of the
She has come up with a plan that may combine the two – setting up her own small day-care service
in a nearby vacant building that is up for lease. She would take children from Mondays to Fridays
each week. She estimates monthly variable costs per child will be:
As her accountant and trusted advisor, Julie would like you to answer a number of questions:
1. Calculate the number of children Julie would need to enrol in her service in order for the
business to break-even.
2. Of course, Julie would like to make a profit. Assuming a target profit of $10,500 per month,
calculate the number of children who must be enrolled to make this number.
3. Assume that the building rent increased to $3,150 and that parents are keen that the
children go on some on field trips. Monthly costs of the field trips are expected to be $1,300.
By how much should Julie increase fees per child to meet the target profit of $10,500 per
month, assuming the same number of children as in requirement 2?
Wenson and Gommi Ltd (WGL) produces babycare products. WGL prides itself on its commitment
to environmental protection and many of its advertisements focus on its slogan, ‘Taking care of your
baby, and your baby’s future’.
One of their most popular products is a sky-blue nappy with pictures of the earth that glow softly in
the dark. Producing this effect requires a chemical process that produces dioxins (a highly toxic and
persistent organic chemical) as a waste product. The Australian government introduced a national
approach to deal with dioxins that included measurement and reduction programs.
In response WGL decided to outsource production to a Pacific island nation where unemployment is
a major problem. WGL does not have any ownership interests in this production company, but is its
only customer. The government of this Pacific nation was very pleased to have this employment
opportunity moving to their country and has been willing to ignore the possible detrimental impact
on their environment. Now the only problem facing WGL are criticisms that the nappies are not
biodegradable. WGL is not concerned, however, since that is a problem for its customers.
1. Discuss the principle of life-cycle analysis and how it might apply to WGL.
2. WGL is considering preparing GRI reports. Will WGL be required to report on the production
of the nappies? Why or why not?
3. What options might be available to manage WGL’s environmental impact?
4. What arguments can you provide for WGL to incur additional costs to reduce the
environmental impact of the production and disposal of their nappies, even though
production and disposal are performed by others?