DFG Ltd uses material BEE in its production of product BETA. A unit of product BETA requires 5 kg of material BEE and the cost per kg of material BEE is K12.50. The annual production of product BETA has always been 10,000 units. The cost of ordering material BEE is K25 per order and the cost of holding the material is K0.10 per kg per annum. Usage of material BEE is at an even rate throughout each year and there are no changes that are expected to occur in the demand for product BETA in the foreseeable future. Currently, DFG Ltd places orders of material BEE in sizes of 8,000 kg and now management would like to establish whether the use of the economic order quantity model would result in any cost reduction. Required: (a) Calculate the annual cost of current ordering policy. [6 Marks] (b) Calculate the economic order quantity and calculate the cost saving that would arise if the company had to change the ordering policy to the use of the economic order quantity model.

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