Stock issues. (From ACCA Financial Information for Management, Part 1, June 2005)
Jane plc purchases its requirements for component RB at a price of £80 per unit. Its annual usage of component RB is 8760 units. The annual holding cost of one unit of component RB is 5% of its purchase price and the cost of placing an order is £12.50.
Required
1. Calculate the economic order quantity (to the nearest unit) for component RB.
2. Assuming that usage of component RB is constant throughout the year (365 days) and that the lead time from placing an order to its receipt is 21 days, calculate the stock level (in units) at which an order should be placed.
3. a. Explain the terms ‘stockout' and ‘buffer stock'.
b. Briefly describe the circumstances in which Jane plc should consider having a buffer stock of component RB.