You are the management accountant of Bright Sigmund Limited, which imports garden furniture for sale to retailers. Most of the business’s sales occur between March and September. The company’s...

You are the management accountant of Bright Sigmund Limited, which imports garden furniture for sale to retailers. Most of the business’s sales occur between March and September. The company’s directors are concerned about the rising level of average inventory turnover in the business. Sales revenue and most categories of costs have been static for the last 2 or 3 years, but inventory levels have increased by over 30%. Costs of inventory storage and insurance have risen. One of the directors has heard about the economic order quantity formula, and has suggested to the Board that the company should use it to try to control its inventory levels.

You have been asked to prepare a briefing paper for the Board which describes the economic order quantity model, and to comment upon its suitability for use in Bright Sigmund Limited.