INVENTORY AND MATERIAL COSTING

(a) Explain the following terms

(i) lead time
(ii) stock-out
(4marks)

(b) Using the basic stock model, the total cost (TC) per year of stocking an item is given by

TC = Co* D + Ch * q GH/year

q 2

where D = the annual demand for the stock item

Co = the variable cost of placing one order, GH/order

Ch = the variable cost of holding one item in stock for one year, GH/item/year

q = order quantity, items/order

(i) Derive the optimum order quantity qo

(6marks)
(ii) Determine the total cost per year at optimum order quantity
(2 marks)

(c) A Confectionery Shopping Centre demands a special brand of confectionery at 12,000

sachets per year. The demand for the commodity is evenly spread over the year. Each
sachet sells at GH4.50. It costs a retailer GH20 to place an order. The holding cost is
10% per annum of the average stock.

Required:

(i) Find the order quantity if the retailer wishes to minimize his stocking costs.
 (4marks)

(ii) Find the minimal total cost per year of stocking the confectionery.
(4marks)

(Total: 20 marks)