Calculation of Re-order Quantity

The re-order quantity is the amount of raw material that a company should order to maintain a certain level of stock. The formula for calculating re-order quantity is:

Re-order Quantity = Maximum Usage Rate x Lead Time

Determination of Maximum Usage Rate

The Maximum Usage Rate is the rate at which the company uses the raw material during a given period. To determine the Maximum Usage Rate, we need to subtract the minimum stock level from the average stock level and divide the result by the number of days in the period.

Maximum Usage Rate = (Average Stock Level – Minimum Stock Level) ÷ Number of Days in the Period

Assuming that the period is one year, or 365 days, we can calculate the Maximum Usage Rate as follows:

Maximum Usage Rate = (15,500 – 6,000) ÷ 365 = 27.4 units per day

Determination of Lead Time

The Lead Time is the time it takes for the company to receive the raw material after placing an order. To determine the Lead Time, the company needs to consider factors such as supplier lead time, transportation time, and processing time.

Assuming that the Lead Time is 10 days, we can calculate the re-order quantity as follows:

Re-order Quantity = Maximum Usage Rate x Lead Time

Re-order Quantity = 27.4 x 10 = 274 units

Therefore, the re-order quantity for the company is 274 units. This means that the company should order 274 units of raw material whenever its stock level reaches the minimum level of 6,000 units to maintain an average stock level of 15,500 units.