Short – term and Mid – term Finance chapter -5 Inventory Management

2𝐴𝑂 Where,
1. Re-Order quantity / EOQ=√
𝐶 A= Total Requirement
O= Ordering Cost/Placement Cost
C=Carrying Cost / Storage cost per unit
𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 𝐴 A= Total Requirement
2. No. of Order= 𝑂𝑟𝑑𝑒𝑟 𝑆𝑖𝑧𝑒
=𝐸𝑂𝑄
Order size= Re-Order quantity / EOQ
𝑂𝑟𝑑𝑒𝑟 𝑠𝑖𝑧𝑒 𝐸𝑂𝑄 Order size= Re-Order quantity / EOQ
3. Average Inventory= =
2 2
4. Safety Stock =Safety time x Average daily uses 𝐴
Average daily uses=360
Safety time=Days in reserve
5. Reorder level= Maximum usage x Maximum time Lead time= Required time in Order
Or =(Lead time x Average daily usage)+ Safety Stock
Maximum Stock Level=Reorder level+ reorder quantity -(Minimum usage reorder quantity= EOQ
x Minimum time)
Minimum Stock Level= reorder level+ (Normal Usage x Normal time) Normal time=average time
𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝑙𝑒𝑣𝑒𝑙+𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝑙𝑒𝑣𝑒𝑙
6. Average level= 2
𝑟𝑒−𝑜𝑟𝑑𝑒𝑟 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
Or minimum level + 2
Cash Management
7. Operating Cycle=Average age of Inventory +Average Collection Period
OC=AAI+ACP
8. Cash on Conversion Cycle= Operating Cycle-Average Payment Periods
Or, CCC=AAI+ACP-APP
𝑇𝑥𝑏 𝑇𝑥𝑏 𝐶
9. Conversion cost = 𝑐
11. Total Cost = 𝑐
+ 2
Xi
𝐶
10. Opportunity Cost=2 X i 12. Economic Lot Size =√
2𝑏𝑇
𝑖
% 𝑜𝑓 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 365
Cost of Trade Credit=100−% 𝑜𝑓 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 x𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑−𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒−𝑁𝑒𝑡 𝑆𝑎𝑙𝑒 𝑉𝑎𝑙𝑢𝑒 365
Cost of Commercial Paper= 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒 𝑉𝑎𝑙𝑢𝑒
x𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑃𝑒𝑟𝑖𝑜𝑑

2𝐴𝑂
1. EOQ/ Reorder Quantity =√ (A= Annual Usage, O=Order Cost, C= Carrying
𝑐
Cost.)
2. Reorder Level= Maximum Usage X Maximum Time =15 x 4 = 60 Usage Unit Time
Or. Minimum 5 2 day
Reorder level = Minimum stock level + (Normal Usage X Normal Normal 10 3 day
time) Maximum 15 4 day
3. Maximum Level = Reorder Level + Reorder Quantity –(Minimum
Usage X Minimum Time) = 60 +200 – (5 x 2)
= 250
4. Minimum Stock Level = Reorder level – ( Normal Usage X Normal time) = 60-(10 x 3) = 30
𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝐿𝑒𝑣𝑒𝑙+𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝐿𝑒𝑣𝑒𝑙 30+250
5. Average Level = 2
= 2
= 140