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All questions of Inventory Control for Mechanical Engineering Exam

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Consider the following data Annual usage = 12,000 units, carrying cost is given as 10% of the unit cost. The cost of an item is Rs. 100. The ordering cost per order is given as Rs. 60 Due to some technical reasons the supply is restricted to only 350 units. Find the total annual cost.
  • a)
    order 500 units of pens whenever inventory level drops to 240 units
  • b)
    order 500 units of pens whenever inventory level drops to 100 units
  • c)
    order 1000 units of pens whenever inventory level drops to 240 units
  • d)
    order 1000 units of pens whenever inventory level drops to 100 units
  • e)
    1203800
Correct answer is between ' order 500 units of pens whenever inventory level drops to 240 units, order 500 units of pens whenever inventory level drops to 100 units'. Can you explain this answer?

Avinash Sharma answered
Given,
D = 12,000 units
CC = 10% × 100 = Rs. 10/unit/year
Co = Rs. 60/order
Supply is restricted to 350 units
EOQ = 380 which is greater than 350 So, find total cost at 350
= Rs. 12,03,807

A company uses 60,000 units per annum of an item, each costing Rs. 120. The ordering cost per order is Rs. 50 and annual inventory carrying costs are 15%. If the company operates 300 days on year, the lead time is given as 10 days and safety stock is 600 units. Find out the re-order level
  • a)
    2400
  • b)
    600
  • c)
    2600
  • d)
    2000
Correct answer is option 'C'. Can you explain this answer?

Pioneer Academy answered
Annual demand = 60,000 units
Unit cost = Rs120/unit
Ordering cost = Rs. 50/order
Carrying costs = 15% × unit cost = Rs. 18/unit‐year
Working days = 300
LT = 10 days
SS = 600 units
ROL = SS + LT × consumption rate
= 200 units /day
ROL = 600 + 10 × 200 = 2600 units

A company has an annual demand of 2000 units, ordering cost of Rs. 100/order and a carrying cost of Rs. 200/unit/year. If the shortage costs are estimated to be nearly Rs. 400/unit/year each time the company runs out of stock, then the stock justified by shortage cost is ______________
  • a)
    22
  • b)
    18
  • c)
    40
  • d)
    38
Correct answer is option 'B'. Can you explain this answer?

Pathways Academy answered
Given data,
D = 2000 units/year
Co = Rs. 100/order
CC = Rs. 200/unit/year
CS = Rs. 400/unit/year
= 54.77 units
≃ 55
Qmax = 36.67 ≈ 37
Qmax + QS = EOQ
QS = 55 − 37
QS = 18 units
Stock justified by shortage cost
= QS = 18 units
∗ Stock justified by the shortage cost = QS

Inventory classification based on criticality of usage is done in which of the following techniques
  • a)
    VED
  • b)
    SOS
  • c)
    XYZ
  • d)
    ABC
Correct answer is option 'A'. Can you explain this answer?

Mrinalini Sharma answered
Inventory Classification Techniques
Inventory classification is crucial in managing materials effectively, especially in a manufacturing or mechanical engineering context. Various techniques exist to categorize inventory based on different criteria.
VED Analysis
- Definition: VED stands for Vital, Essential, and Desirable. This technique classifies inventory based on the criticality of usage.
- Categories:
- Vital: Items that are essential for the operation and cannot be substituted. Their absence can halt production.
- Essential: Items necessary for functioning but can be temporarily substituted with alternatives.
- Desirable: Items that enhance efficiency but are not critical for operations.
Importance of VED
- Operational Continuity: By identifying vital items, organizations can ensure that critical components are always available, minimizing downtime.
- Resource Allocation: It helps prioritize procurement and stock management based on the importance of items, ensuring efficient use of resources.
Other Techniques
- SOS (Seasonal, Obsolescence, and Slow-moving): Focuses on the seasonality and life cycle of items rather than their criticality.
- XYZ Analysis: Primarily categorizes items based on their usage variability and demand predictability.
- ABC Analysis: Classifies inventory based on the value of items, grouping them into high, medium, and low-value categories.
Conclusion
Among these techniques, VED is the most effective for classifying inventory based on criticality of usage. It emphasizes the importance of items in operational processes, making it a valuable tool for inventory management in mechanical engineering and beyond.

For lead time and consumption the probabilities are given in the table below
If reorder point is 5,00,000 units. The buffer stock is ______________
  • a)
    50,000
  • b)
    75,000
  • c)
    25,000
  • d)
    1,00,000
Correct answer is option 'B'. Can you explain this answer?

Zoya Sharma answered
Average lead time
= 34 days
Average consumption
= 12500 units ROP or ROL = Buffer stock or safety stock + Avg. LT × avg. consumption
5, 00,000 = SS + 34 × 12500 SS = 75,000 units

ABC analysis divides on-hand inventory into three classes, generally based on
  • a)
    item quality
  • b)
    unit price
  • c)
    annual rupee volume
  • d)
    the number of units on hand
Correct answer is option 'C'. Can you explain this answer?

Sravya Tiwari answered
ABC analysis is a technique used in inventory management to categorize items based on their annual rupee volume. The three classes are:

1. Class A: These are high-value items that account for a significant portion of the annual rupee volume, typically around 80%. These items are critical to the business and require careful management to ensure that they are always available.

2. Class B: These are medium-value items that account for around 15% of the annual rupee volume. They are important but not critical to the business, and require less management than Class A items.

3. Class C: These are low-value items that account for the remaining 5% of the annual rupee volume. They are typically low-cost items that are readily available and require minimal management.

The purpose of ABC analysis is to help businesses prioritize their inventory management efforts. By focusing on the most important items, businesses can ensure that they always have the inventory they need to meet customer demand, while minimizing the cost of carrying excess inventory.

In practice, ABC analysis involves calculating the annual rupee volume for each item in inventory and then ranking them from highest to lowest. The items are then divided into the three classes based on their cumulative percentage of the annual rupee volume.

Overall, ABC analysis is a valuable tool for inventory management that can help businesses optimize their inventory levels and reduce costs.

A manufacturing company has a contract to supply 5000 components to an automobile company per day. The manufacturing capacity of the company is 7000 components per day. The carrying cost of 1000 components is 20 paise per day. The set-up cost is Rs. 20. The total inventory cost per annum on optimum basis is __________
  • a)
    230
  • b)
    1236
Correct answer is between ' 230, 1236'. Can you explain this answer?

Arjun Unni answered
To find the total inventory cost per annum on the optimum basis, we need to consider the carrying cost, set-up cost, and the production capacity of the manufacturing company.

Carrying Cost Calculation:
The carrying cost is the cost associated with holding inventory. In this case, the carrying cost of 1000 components is given as 20 paise per day. To calculate the carrying cost per annum, we need to multiply this cost by the number of days in a year (365).

Carrying cost per annum = Carrying cost per day * Number of days in a year
= 20 paise * 1000 * 365
= Rs. 7300

Set-up Cost Calculation:
The set-up cost is the cost incurred each time the manufacturing company starts a new production run. In this case, the set-up cost is given as Rs. 20 per set-up.

Total set-up cost per annum = Set-up cost per set-up * Number of set-ups per annum

Now, we need to determine the number of set-ups per annum. Since the manufacturing capacity is 7000 components per day and the automobile company requires 5000 components per day, the manufacturing company needs to produce 5000 components each day to meet the demand. Therefore, the number of set-ups per day is given by:

Number of set-ups per day = Manufacturing capacity / Components required per day
= 7000 / 5000
= 1.4

However, since the number of set-ups cannot be a fraction, we round it up to the nearest whole number. Therefore, the number of set-ups per day is 2.

Number of set-ups per annum = Number of set-ups per day * Number of working days per annum
= 2 * 365
= 730

Total set-up cost per annum = Rs. 20 * 730
= Rs. 14,600

Total Inventory Cost Calculation:
The total inventory cost per annum can be calculated by summing up the carrying cost and the set-up cost.

Total inventory cost per annum = Carrying cost per annum + Total set-up cost per annum
= Rs. 7300 + Rs. 14,600
= Rs. 21,900

Therefore, the total inventory cost per annum on the optimum basis is Rs. 21,900 (option b).

In fixed order quantity system i.e., Q-system, orders are placed whenever
  • a)
    stock equal’s to buffer stock
  • b)
    stock equals to ROP
  • c)
    stock equals to EOQ
  • d)
    None
Correct answer is option 'B'. Can you explain this answer?

Meera Bose answered
Understanding the Fixed Order Quantity System (Q-System)
The fixed order quantity system, commonly referred to as the Q-system, is a widely used inventory management approach. This system is designed to maintain optimal inventory levels by determining when to reorder stock based on specific criteria.
Key Concept: Reorder Point (ROP)
- The primary trigger for placing an order in a Q-system is when stock levels reach the Reorder Point (ROP).
- ROP is the inventory level at which a new order should be initiated to replenish stock before it runs out.
- This ensures that the inventory does not fall below a critical level, preventing stockouts.
Why ROP is the Correct Answer
- Buffer Stock: This refers to the extra inventory held to safeguard against fluctuations in demand or supply. It is not the trigger for ordering but rather a safety measure.
- Economic Order Quantity (EOQ): While this is a method used to determine the optimal order size that minimizes total inventory costs, it does not dictate when to place an order.
- Stock Equals Buffer Stock: This condition does not trigger a reorder in the Q-System. Buffer stock is maintained to absorb variability, rather than serve as a reorder signal.
Conclusion
In summary, the correct answer is option 'B' because the Q-system relies on the Reorder Point (ROP) to dictate when orders should be placed. By monitoring stock levels and utilizing ROP effectively, organizations can ensure a seamless supply chain and avoid interruptions in operations.

The lead time and consumption pattern of a component is as follows:
If safety stock = 54,000 units. The ROL is
  • a)
    2,50,000
  • b)
    3,00,000
  • c)
    2,46,000
  • d)
    2,40,000
Correct answer is option 'B'. Can you explain this answer?

Neha Joshi answered
Average lead time
= 0.2 × 15 + 0.5 × 20 + 0.3 × 25
= 20.5
Average consumption
= 0.5 × 10,000 + 0.5 × 14,000
= 12,000 units
ROL = SS + Avg. lead time × Avg. consumption
= 54,000 + 20.5 × 12,000
= 3,00,000

Economic Order Quantity is the quantity at which the cost of carrying is
  • a)
    minimum
  • b)
    equal to the cost of ordering
  • c)
    less than the cost of ordering
  • d)
    cost of over-stocking
Correct answer is option 'B'. Can you explain this answer?

Priyanka Tiwari answered
Explanation:

Economic Order Quantity (EOQ) is a method used in inventory management to determine the optimal quantity of goods to order at one time in order to minimize the total costs associated with ordering and carrying inventory. The EOQ formula takes into account the cost of ordering, the cost of carrying inventory, and the demand for the product.

The formula for EOQ is:

EOQ = √((2DS)/H)

Where:
D = Annual demand
S = Cost of placing an order
H = Holding cost per unit per year

Minimum Cost:

The objective of EOQ is to find the quantity that minimizes the total cost of ordering and carrying inventory. The total cost includes the cost of ordering and the cost of carrying inventory. When the quantity ordered is too small, the cost of ordering will be high, as the order will need to be placed frequently. On the other hand, if the quantity is too large, the cost of carrying inventory will be high, as the inventory will need to be stored for a longer period of time. Therefore, the optimal quantity is the one that minimizes the total cost.

Equal Cost:

The EOQ model is based on the assumption that the cost of ordering and the cost of carrying inventory are the only costs associated with inventory. The optimal quantity is the one that balances the cost of ordering and the cost of carrying inventory. When the quantity ordered is equal to the EOQ, the total cost of ordering and carrying inventory is minimized.

Less than the Cost of Ordering:

If the quantity ordered is less than the EOQ, the cost of ordering will be high, as the order will need to be placed frequently. This will increase the total cost of ordering and carrying inventory.

Cost of Over-stocking:

If the quantity ordered is more than the EOQ, the cost of carrying inventory will be high, as the inventory will need to be stored for a longer period of time. This will increase the total cost of ordering and carrying inventory, and may lead to over-stocking, which can result in additional costs such as obsolescence and storage costs.

Conclusion:

In conclusion, the Economic Order Quantity (EOQ) is the quantity at which the cost of carrying is equal to the cost of ordering. The EOQ model is based on the assumption that the cost of ordering and the cost of carrying inventory are the only costs associated with inventory. When the quantity ordered is equal to the EOQ, the total cost of ordering and carrying inventory is minimized.

In the ABC method of inventory control, Group A constitutes costly items. What is the usual percentage of such items of the total items?
  • a)
    10 to 20%
  • b)
    20 to 30%
  • c)
    30 to 40 %
  • d)
    40 to 50 %
Correct answer is option 'A'. Can you explain this answer?

Sagarika Mukherjee answered
Understanding the ABC Method
The ABC method of inventory control categorizes inventory into three classes: A, B, and C, based on their value and importance to the business.
Category A: Costly Items
- Group A items are the most valuable in terms of cost.
- These items represent a small percentage of the total inventory but account for a significant portion of the overall inventory value.
- Typically, Group A comprises about 10 to 20% of the total items.
Importance of Group A Items
- Monitoring and managing Group A items is crucial because they have a higher impact on the company’s finances.
- Effective control of these items can lead to significant cost savings and efficiency improvements.
Distribution of Inventory Value
- The distribution often follows the Pareto principle, where 80% of the effects come from 20% of the causes.
- In inventory terms, 10 to 20% of items (Group A) can account for up to 70-80% of the total inventory costs.
Conclusion
- The classification helps businesses prioritize their inventory management efforts.
- By focusing on the costly items in Group A, companies can optimize stock levels, reduce carrying costs, and improve cash flow.
This strategic approach ensures that resources are allocated effectively, maximizing profitability while minimizing unnecessary expenses.

Which of the following statement is correct regarding EOQ?
  • a)
    Carrying cost is minimum
  • b)
    Ordering cost is minimum
  • c)
    Total inventory cost is minimum
  • d)
    Ordering quantity is minimum
Correct answer is option 'C'. Can you explain this answer?

Mahesh Yadav answered
Understanding EOQ (Economic Order Quantity)
The Economic Order Quantity (EOQ) model is a crucial concept in inventory management that helps businesses determine the optimal order quantity to minimize total inventory costs.
What is Total Inventory Cost?
Total inventory cost comprises three main components:
- Carrying Costs: These are costs associated with holding inventory, such as storage, insurance, and depreciation.
- Ordering Costs: These costs are incurred each time an order is placed, including shipping and handling costs.
- Stockout Costs: Costs arising when inventory runs out and includes lost sales and customer dissatisfaction.
Why is Option C Correct?
- Minimization of Total Inventory Costs: The EOQ model aims to find the order quantity that minimizes the total inventory costs. It balances the carrying and ordering costs effectively.
- Trade-off Between Costs: As order quantity increases, carrying costs rise due to more inventory being held. However, ordering costs decrease as fewer orders are needed. The EOQ formula identifies the point where these two costs are minimized together.
- Optimal Quantity: The EOQ leads to a specific order quantity that, when followed, results in the lowest total cost. This is critical for businesses to maintain efficiency and profitability.
Conclusion
In conclusion, the correct statement regarding EOQ is that it minimizes total inventory costs (Option C). Understanding this helps businesses manage their inventory more effectively, balancing the costs associated with ordering and carrying inventory.

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