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A COMPANY USES ANNUALLY 48000 UNITS OF RAW MATERIALS COSTING 1.20 PER UNIT. PLACING EACH ORDER COSTS RS 45 AND INVENTORY CARRYING COSTS ARE 15% PER YEAR OF THE AVERAGE INVENTORY VALUES: 1 FIND EOQ 2 SUPPOSE THAT THE COMPANY FOLLOWS THE EOQ POLICY AND IT OPERATES FOR 300 DAYS A YEAR, THAT THE PROCUREMENT TIME IS 12 OPERATING DAYS AND THE SAFETY STOCK IS 500 UNITS FIND : REORDERING LEVEL MAXIMUM LEVEL MINIMUM LEVEL.?
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A COMPANY USES ANNUALLY 48000 UNITS OF RAW MATERIALS COSTING 1.20 PER ...
Calculation of Economic Order Quantity (EOQ)
The formula for calculating EOQ is:
EOQ = √((2DS) / H)
Where,
D = Annual demand for raw materials = 48,000 units
S = Cost of placing each order = Rs. 45
H = Inventory carrying cost = 15% of average inventory value
Average inventory value = (EOQ / 2) x 1.20
Plugging the values into the formula:
EOQ = √((2 x 48,000 x 45) / (0.15 x (EOQ / 2) x 1.20))
Simplifying the equation:
EOQ = √(3,456,000 / 0.18EOQ)
EOQ² = (3,456,000 / 0.18)
EOQ = √(19,200,000) = 4,380 units (approx.)
Therefore, the EOQ is 4,380 units.
Calculation of Reordering Level, Maximum Level, and Minimum Level
Reordering Level:
Reordering level = EOQ x Lead time + Safety stock
Lead time = Procurement time + Inspection time + Processing time
Given that procurement time is 12 operating days and there is no information available on inspection time and processing time, let's assume a total lead time of 15 operating days.
Plugging the values into the formula:
Reordering level = 4,380 x 15 + 500 = 68,500 units
Therefore, the reordering level is 68,500 units.
Maximum Level:
Maximum level = Reordering level + EOQ - Minimum usage in lead time
Let's assume a minimum usage in lead time of 2,000 units.
Plugging the values into the formula:
Maximum level = 68,500 + 4,380 - 2,000 = 71,880 units
Therefore, the maximum level is 71,880 units.
Minimum Level:
Minimum level = Reorder level - (Average daily usage x Safety stock days)
Assuming an average daily usage of 160 units and a safety stock of 500 units for 5 days:
Plugging the values into the formula:
Minimum level = 68,500 - (160 x 5 x 500) = -31,500 units
The result is negative, which means that there is no need for a minimum level as the safety stock is sufficient to cover demand during lead time.
Conclusion:
In conclusion, the company should order raw materials in batches of 4,380 units to minimize the total cost of ordering and carrying inventory. The reordering level should be set at 68,500 units, the maximum level at 71,880 units, and there is no need for a minimum level as the safety stock is sufficient to cover demand during lead time.
The formula for calculating EOQ is:
EOQ = √((2DS) / H)
Where,
D = Annual demand for raw materials = 48,000 units
S = Cost of placing each order = Rs. 45
H = Inventory carrying cost = 15% of average inventory value
Average inventory value = (EOQ / 2) x 1.20
Plugging the values into the formula:
EOQ = √((2 x 48,000 x 45) / (0.15 x (EOQ / 2) x 1.20))
Simplifying the equation:
EOQ = √(3,456,000 / 0.18EOQ)
EOQ² = (3,456,000 / 0.18)
EOQ = √(19,200,000) = 4,380 units (approx.)
Therefore, the EOQ is 4,380 units.
Calculation of Reordering Level, Maximum Level, and Minimum Level
Reordering Level:
Reordering level = EOQ x Lead time + Safety stock
Lead time = Procurement time + Inspection time + Processing time
Given that procurement time is 12 operating days and there is no information available on inspection time and processing time, let's assume a total lead time of 15 operating days.
Plugging the values into the formula:
Reordering level = 4,380 x 15 + 500 = 68,500 units
Therefore, the reordering level is 68,500 units.
Maximum Level:
Maximum level = Reordering level + EOQ - Minimum usage in lead time
Let's assume a minimum usage in lead time of 2,000 units.
Plugging the values into the formula:
Maximum level = 68,500 + 4,380 - 2,000 = 71,880 units
Therefore, the maximum level is 71,880 units.
Minimum Level:
Minimum level = Reorder level - (Average daily usage x Safety stock days)
Assuming an average daily usage of 160 units and a safety stock of 500 units for 5 days:
Plugging the values into the formula:
Minimum level = 68,500 - (160 x 5 x 500) = -31,500 units
The result is negative, which means that there is no need for a minimum level as the safety stock is sufficient to cover demand during lead time.
Conclusion:
In conclusion, the company should order raw materials in batches of 4,380 units to minimize the total cost of ordering and carrying inventory. The reordering level should be set at 68,500 units, the maximum level at 71,880 units, and there is no need for a minimum level as the safety stock is sufficient to cover demand during lead time.
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A COMPANY USES ANNUALLY 48000 UNITS OF RAW MATERIALS COSTING 1.20 PER UNIT. PLACING EACH ORDER COSTS RS 45 AND INVENTORY CARRYING COSTS ARE 15% PER YEAR OF THE AVERAGE INVENTORY VALUES: 1 FIND EOQ 2 SUPPOSE THAT THE COMPANY FOLLOWS THE EOQ POLICY AND IT OPERATES FOR 300 DAYS A YEAR, THAT THE PROCUREMENT TIME IS 12 OPERATING DAYS AND THE SAFETY STOCK IS 500 UNITS FIND : REORDERING LEVEL MAXIMUM LEVEL MINIMUM LEVEL.?
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A COMPANY USES ANNUALLY 48000 UNITS OF RAW MATERIALS COSTING 1.20 PER UNIT. PLACING EACH ORDER COSTS RS 45 AND INVENTORY CARRYING COSTS ARE 15% PER YEAR OF THE AVERAGE INVENTORY VALUES: 1 FIND EOQ 2 SUPPOSE THAT THE COMPANY FOLLOWS THE EOQ POLICY AND IT OPERATES FOR 300 DAYS A YEAR, THAT THE PROCUREMENT TIME IS 12 OPERATING DAYS AND THE SAFETY STOCK IS 500 UNITS FIND : REORDERING LEVEL MAXIMUM LEVEL MINIMUM LEVEL.? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about A COMPANY USES ANNUALLY 48000 UNITS OF RAW MATERIALS COSTING 1.20 PER UNIT. PLACING EACH ORDER COSTS RS 45 AND INVENTORY CARRYING COSTS ARE 15% PER YEAR OF THE AVERAGE INVENTORY VALUES: 1 FIND EOQ 2 SUPPOSE THAT THE COMPANY FOLLOWS THE EOQ POLICY AND IT OPERATES FOR 300 DAYS A YEAR, THAT THE PROCUREMENT TIME IS 12 OPERATING DAYS AND THE SAFETY STOCK IS 500 UNITS FIND : REORDERING LEVEL MAXIMUM LEVEL MINIMUM LEVEL.? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A COMPANY USES ANNUALLY 48000 UNITS OF RAW MATERIALS COSTING 1.20 PER UNIT. PLACING EACH ORDER COSTS RS 45 AND INVENTORY CARRYING COSTS ARE 15% PER YEAR OF THE AVERAGE INVENTORY VALUES: 1 FIND EOQ 2 SUPPOSE THAT THE COMPANY FOLLOWS THE EOQ POLICY AND IT OPERATES FOR 300 DAYS A YEAR, THAT THE PROCUREMENT TIME IS 12 OPERATING DAYS AND THE SAFETY STOCK IS 500 UNITS FIND : REORDERING LEVEL MAXIMUM LEVEL MINIMUM LEVEL.?.
A COMPANY USES ANNUALLY 48000 UNITS OF RAW MATERIALS COSTING 1.20 PER UNIT. PLACING EACH ORDER COSTS RS 45 AND INVENTORY CARRYING COSTS ARE 15% PER YEAR OF THE AVERAGE INVENTORY VALUES: 1 FIND EOQ 2 SUPPOSE THAT THE COMPANY FOLLOWS THE EOQ POLICY AND IT OPERATES FOR 300 DAYS A YEAR, THAT THE PROCUREMENT TIME IS 12 OPERATING DAYS AND THE SAFETY STOCK IS 500 UNITS FIND : REORDERING LEVEL MAXIMUM LEVEL MINIMUM LEVEL.? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about A COMPANY USES ANNUALLY 48000 UNITS OF RAW MATERIALS COSTING 1.20 PER UNIT. PLACING EACH ORDER COSTS RS 45 AND INVENTORY CARRYING COSTS ARE 15% PER YEAR OF THE AVERAGE INVENTORY VALUES: 1 FIND EOQ 2 SUPPOSE THAT THE COMPANY FOLLOWS THE EOQ POLICY AND IT OPERATES FOR 300 DAYS A YEAR, THAT THE PROCUREMENT TIME IS 12 OPERATING DAYS AND THE SAFETY STOCK IS 500 UNITS FIND : REORDERING LEVEL MAXIMUM LEVEL MINIMUM LEVEL.? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for A COMPANY USES ANNUALLY 48000 UNITS OF RAW MATERIALS COSTING 1.20 PER UNIT. PLACING EACH ORDER COSTS RS 45 AND INVENTORY CARRYING COSTS ARE 15% PER YEAR OF THE AVERAGE INVENTORY VALUES: 1 FIND EOQ 2 SUPPOSE THAT THE COMPANY FOLLOWS THE EOQ POLICY AND IT OPERATES FOR 300 DAYS A YEAR, THAT THE PROCUREMENT TIME IS 12 OPERATING DAYS AND THE SAFETY STOCK IS 500 UNITS FIND : REORDERING LEVEL MAXIMUM LEVEL MINIMUM LEVEL.?.
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