Practice question
Ace Ltd. manufactures a product and the following particulars are collected for the year ended March, 2013:
• Monthly demand (units) 25000
• Cost of placing an order (') 10000
• Annual carrying cost (per unit) 1500
• Normal usage (units per week) 5000
• Minimum usage (units per week) 2500
• Maximum usage (units per week) 7500
• Re-order period (weeks) 4-6
Practice question cont...
• You are required to calculate:
• (i) Re-order quantity
• (ii) Re-order level
(iii) Minimum level
(iv) Maximum level
• (v) Average stock level
(i) Re-order quantity:
Re-order quantity = (Demand per week x Re-order period) + Safety stock
Demand per week = Monthly demand / 4.33 weeks = 25000 / 4.33 = 5772 units
Re-order quantity = (5772 x 5) + Safety stock
(ii) Re-order level:
Re-order level = Demand during lead time + Safety stock
Lead time = Re-order period x 1 week = 5 weeks
Demand during lead time = Demand per week x Lead time = 5772 x 5 = 28860 units
Re-order level = 28860 + Safety stock
(iii) Minimum level:
Minimum level = (Minimum usage per week + Safety stock) x Re-order period
Minimum usage per week = 2500 units
Minimum level = (2500 + Safety stock) x 5
(iv) Maximum level:
Maximum level = (Maximum usage per week x Re-order period) + Safety stock
Maximum usage per week = 7500 units
Maximum level = (7500 x 5) + Safety stock
(v) Average stock level:
Average stock level = (Re-order quantity / 2) + Safety stock