Question 1
- (a) Explain the following terms in storekeeping:
- stockout;
- lead time;
- economic order quantity;
1 (b) (i) The annual demand of a fruit juice distributor is 5,000 cartons. If the ordering cost is N 40 per carton and the carrying cost is N 10 per carton. Calculate the economic order quantity for the product.
(ii) State five assumptions of economic order quantity.
Comment
Most of the candidates attempted this question and the performance was very encouraging in 1 (a).
The responses expected from candidates are:
1(a) Explanation of terms
- Stockout: This is a situation where materials in the store or inventory are completely used up or exhausted without replenishment. i.e. the storekeeper can no longer issue materials, due to unavailability of materials in the store.
- Lead time: This is the time interval between when an order is placed and when materials are delivered or received. i.e. time frame between ordering and replenishment of stock.
- Economic order quantity: This is the optimal quantity of materials to be ordered by organization at a time in order to minimize the total ordering cost and carrying cost.
(c) Assumptions of EOQ
- Stock holding cost is constant.
- The rate of demand is known.
- Replenishment is made instantaneously.
- Unit price is constant.
- Ordering cost is known and constant.
- Absence of storage capacity limitations.
- Stock holding is known and constant.
- Lead time does not fluctuate.