Inventory and Total Holding Costs

1397 words 6 pages
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Mabuhay Products Inc.Submitted by:Michelle MolasAdrian ManlapigAngela NunezKatrina Silvoza |

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Point of View_________________________

This case was analyzed from the point of view of Robert Ocampo, the inventory manager of Mabuhay Products Incorporated.

Case of Context_______________________

Mabuhay Company Incorporated owns 50 grocery outlets scattered around the metro but has only one main warehouse where all the goods are stored prior to delivery. The current inventory policy of the company had been practiced for the past 15 years. It mandates the monthly reorder of stocks by the main warehouse, and charging the branches with the delivery cost and a 3% financing charge per month on their inventory costs. The
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First, the group computed for the total holding costs when purchasing ahead of time safety stock equivalent to three months’ sales, which is 6,000 units. Inventory is expected to decrease according to the expected monthly demand of 2,000 units. Holding cost for the first three months, therefore, decreases accordingly.

For the first month, average inventory is estimated to be 5,000 units (average of beginning inventory of 6,000 units and ending inventory of 4,000 units). At this inventory level, holding cost is estimated to be Php30,000*.

For the second month, average inventory is estimated to be 3,000 units (average of beginning inventory of 4,000 units and ending inventory of 2,000 units). At this inventory level, holding cost is estimated to be Php18,000.

For the third month, average inventory is estimated to be 1,000 units (average of beginning inventory of 2,000 units and ending inventory of 0). At this inventory level, holding cost is estimated to be Php6,000.

Total holding cost for three months if safety stock IS purchased is Php54,000.

*Holding cost is computed as follows:

THC for the month=Ave.no.of units×Purchase price per unit ×Holding cost per year ×1/12

To illustrate, holding cost is computed as follows for the first month:

THC for month 1=5,000 ×Php1,200×6%×112=Php30,000

After computing for the total holding costs of purchasing safety stock equivalent to three months’ sales, the group computed for the total

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