Nitrogen Chemicals is considering the optimal batch size for the reorder of concentrated sulphuric acid. The management accountant has supplied the following information: • The purchase price of H2 SO4 is K150 per gallon • The clerical and data processing costs are K500 per order. All the transport is done by rail. A charge of K2000 is made each time the special line to the factory is opened. A charge of K20 per gallon is also made. The company uses

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Nitrogen Chemicals is considering the optimal batch size for the reorder of concentrated sulphuric acid. The management accountant has supplied the following information:

• The purchase price of H2 SO4 is K150 per gallon

• The clerical and data processing costs are K500 per order.

All the transport is done by rail. A charge of K2000 is made each time the special line to the factory is opened. A charge of K20 per gallon is also made. The company uses 40,000 gallons per year. Maintenance costs of stocks are K200 per gallon per year.

Each gallon requires 0.5 square metres of storage space. If warehouse space is not used, it can be rented out to another company at K200 per square metre per annum. Available warehouse space is 1000 square metres, the overhead costs being K5000 per annum. Calculate:

  1. The most economical batch size
  2. The number of production runs to be made

The total cost of stocking sulphuric acid per annum

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Why aren't we using the overhead costs and the extra charges as part of the holding cost per unit and ordering cost per order respectively???

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