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ECONOMIC ORDER QUANTITY

ADVANCED COST & MANAGEMENT ACCOUNTING


COM-604
LECTURER SARMED RAZA (UAF)
ECONOMIC ORDER QUANTITY

2 × 𝐴𝑅 × 𝑂𝐶
• 𝐸𝑂𝑄 = 𝐶𝐶

• WHERE: AR = NUMBER OF UNITS REQUIRED FOR THE YEAR, ANNUAL REQUIREMENT.


OC = VARIABLE COST OF PLACING ONE PURCHASE ORDER, ORDERING COST.
CC = INVENTORY CARRYING COST OF ONE UNIT OF THE MATERIAL FOR ONE YEAR,
CARRYING COST.
• AT THIS POINT IT IS IMPORTANT FOR THE STUDENTS TO UNDERSTAND FOLLOWING FURTHER COMPUTATIONS
RELEVANT TO EOQ.
1. AR / EOQ = NUMBER OF ORDERS TO BE PLACED DURING THE YEAR (NO).
2. NO × OC = TOTAL ORDERING COST FOR THE YEAR (TOC).
3. EOQ / 2 = UNITS IN AVERAGE INVENTORY HELD DURING THE YEAR (UAI).
4. UAI × CC = TOTAL CARRYING COST OF THE ITEM FOR THE YEAR.
5. NUMBER OF DAYS AFTER WHICH AN ORDER SHOULD BE PLACED = 365 DAYS / NO.
• SOLUTION 8-20.
• ECONOMIC ORDER QUANTITY:
ECONOMIC ORDER
QUANTITY 𝐸𝑂𝑄 =
2 × 𝐴𝑅 × 𝑂𝐶
𝐶𝐶

2 × 7,200 𝑚𝑒𝑡𝑒𝑟𝑠 × 𝑅𝑠.12.50


𝐸𝑂𝑄 =
𝑅𝑠. 2.50 ×20%

180,000
8-20. E.O.Q. CALCULATE THE ECONOMIC ORDER QUANTITY AND NUMBER OF ORDERS NEEDED 𝐸𝑂𝑄 =
0.50
PER YEAR FOR ACQUISITION OF BLUE BAG CLOTH B.P.12345.
𝐸𝑂𝑄 = 360,000
AVAILABLE DATA:
𝐸𝑂𝑄 = 600 𝑚𝑒𝑡𝑒𝑟𝑠
ANNUAL REQUIREMENT OF BLUE BAG CLOTH B.P.12345 …………………… 7,200 METERS
• NUMBER OF ORDERS PER YEAR:
ORDERING COST ……………………………………………………… RS. 12.50 PER ORDER

CARRYING COST OF INVENTORY ………………………………………...……………. 20% 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 =


𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡
𝐸𝑂𝑄
SAFETY STOCK REQUIREMENT ………………………………………...……………… NONE
7,200 𝑚𝑒𝑡𝑒𝑟𝑠
UNIT COST OF BLUE BAG CLOTH B.P.12345 ……………………………. RS. 2.50 PER METER 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 = 600 𝑚𝑒𝑡𝑒𝑟𝑠

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 = 12 𝑜𝑟𝑑𝑒𝑟𝑠


• SOLUTION 8-21.
• (1) ECONOMIC ORDER QUANTITY:

ECONOMIC ORDER 𝐸𝑂𝑄 =


2 × 𝐴𝑅 × 𝑂𝐶
𝐶𝐶
QUANTITY 2 × 48,000 𝑢𝑛𝑖𝑡𝑠 × 𝑅𝑠. 9
𝐸𝑂𝑄 =
𝑅𝑠. 4 × 15%

864,000
𝐸𝑂𝑄 =
8-21.E.O.Q. THE RIZWAN EQUIPMENT COMPANY ESTIMATES ITS 0.60
CARRYING COST AT 15% AND ITS ORDERING COST RS. 9.00 PER
ORDER. THE ESTIMATED ANNUAL REQUIREMENT IS 48,000 UNITS AT A
𝐸𝑂𝑄 = 1,440,000
PRICE OF RS. 4.00 PER UNIT. 𝐸𝑂𝑄 = 1,200 UNITS
REQUIRED: • (2) NUMBER OF ORDERS PER YEAR:
(1) WHAT IS THE MOST ECONOMICAL NUMBER OF UNITS TO ORDER? 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 =
𝐸𝑂𝑄
(2) NUMBER OF ORDERS TO BE PLACED IN A YEAR.

(3) ABOUT HOW OFTEN WILL AN ORDER NEED TO BE PLACED? 48,000 𝑢𝑛𝑖𝑡𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 =
1,200 𝑢𝑛𝑖𝑡𝑠
(4) PROOF OF CORRECTNESS OF YOUR ANSWER FOR (1) IN THE FORM
OF A TABLE.
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 = 40 𝑜𝑟𝑑𝑒𝑟𝑠
• (3) NUMBER OF DAYS AFTER WHICH AN ORDER SHOULD BE PLACED:
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑜𝑛𝑒 𝑦𝑒𝑎𝑟 365
= = 9 𝑑𝑎𝑦𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 40
CONTINUE • (4) PROOF:

Annual Order Size No. of Ordering Average Carrying Total Cost


Requiremen Orders Cost Inventory Cost
t
48,000 1000 units 48 432 500 units 300 732
units
48,000 1200 units 40 360 600 units 360 720
units
48,000 1600 units 30 270 800 units 480 750
units

• NOTES:
1) ORDER SIZE = ASSUMED
2) NUMBER OF ORDERS = ANNUAL REQUIREMENT ÷ ORDER SIZE
3) ORDERING COST = NUMBER OF ORDERS × RS. 9 PER ORDER
4) AVERAGE INVENTORY = ORDER SIZE / 2
5) CARRYING COST = RS. 4 × 15% = RS. 0.6 × UNITS IN AVERAGE INVENTORY
6) TOTAL COST = ORDERING COST + CARRYING COST
• SOLUTION 8-22.
• (1) ECONOMIC ORDER QUANTITY:

ECONOMIC ORDER 𝐸𝑂𝑄 =


2 × 𝐴𝑅 × 𝑂𝐶
𝐶𝐶

QUANTITY 𝐸𝑂𝑄 =
2 × 56,250 𝑢𝑛𝑖𝑡𝑠 ×𝑅𝑠.100
𝑅𝑠. 15 + (𝑅𝑠. 50 × 10%)

11,250,000
𝐸𝑂𝑄 = 20

8-22. E.O.Q. CARRYING COST = STORING COST + INTEREST.


𝐸𝑂𝑄 = 562,500
FOLLOWING DATA ARE AVAILABLE WITH RESPECT TO A CERTAIN MATERIAL.
𝐸𝑂𝑄 = 750 UNITS
ANNUAL REQUIREMENT ……………………………………… 56,250 UNITS
• (2) NUMBER OF ORDERS PER YEAR:
COST TO PLACE AN ORDER …………………………………........…. RS. 100
𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 =
ANNUAL INTEREST RATE ………………………………………………... 10% 𝐸𝑂𝑄

ANNUAL CARRYING COST PER UNIT …………………….…………... RS. 15


56,250 𝑢𝑛𝑖𝑡𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 =
PER UNIT COST ……………………………………………..………… RS. 50 750 𝑢𝑛𝑖𝑡𝑠

REQUIRED: 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 = 75 𝑜𝑟𝑑𝑒𝑟𝑠


(1) ECONOMIC ORDER QUANTITY. • (3) FREQUENCY OF ORDERS:
(2) NUMBER OF ORDERS PER YEAR. 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑜𝑛𝑒 𝑦𝑒𝑎𝑟 360
= = 4.8 𝑑𝑎𝑦𝑠 𝑜𝑟 5 𝑑𝑎𝑦𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 75
(3) FREQUENCY OF ORDERS.
ECONOMIC ORDER • SOLUTION 8-23.
QUANTITY • ECONOMIC ORDER QUANTITY:

2 × 𝐴𝑅 × 𝑂𝐶
𝐸𝑂𝑄 =
𝐶𝐶

8-23. E.O.Q. CALCULATION OF SAVINGS. NEELAM


2 × 19,200 𝑢𝑛𝑖𝑡𝑠 ×𝑅𝑠. 75
INDUSTRY LIMITED PURCHASES A CERTAIN ITEM OF RAW 𝐸𝑂𝑄 =
𝑅𝑠. 40 × 20%
MATERIALS IN LOTS OF 9,600 UNITS WHICH IS A SIX
MONTHS’ SUPPLY. THE COST PER UNIT IS RS. 40.00, 2,880,000
𝐸𝑂𝑄 =
ORDERING COST IS RS. 75 PER ORDER AND CARRYING 8

COST IS 20%.
𝐸𝑂𝑄 = 360,000
REQUIRED: HOW MUCH CAN THE COMPANY CAN SAVE
𝐸𝑂𝑄 = 600 UNITS
PER YEAR BY BUYING IN THE MOST ECONOMICAL LOTS?
CONTINUE • CALCULATION OF SAVING:
Annual Order Size No. of Ordering Average Carrying Total Cost
Requiremen Orders Cost Inventory Cost
t
19,200 9,600 units 2 150 4,800 units 38,400 38,550
units
19,200 600 units 32 2400 300 units 2,400 4,800
units
Saving Per Year 33,750

• NOTES:
1) NUMBER OF ORDERS = ANNUAL REQUIREMENT ÷ ORDER SIZE
2) ORDERING COST = NUMBER OF ORDERS × RS. 75 PER ORDER
3) AVERAGE INVENTORY = ORDER SIZE / 2
4) CARRYING COST = RS. 40 × 20% = RS. 8 × UNITS IN AVERAGE INVENTORY
5) TOTAL COST = ORDERING COST + CARRYING COST
ECONOMIC ORDER • SOLUTION 8-24.
QUANTITY • (1) ECONOMIC ORDER QUANTITY:
2 × 𝐴𝑅 × 𝑂𝐶
𝐸𝑂𝑄 =
𝐶𝐶

8-24. E.O.Q. CALCULATION OF SAVING. IT IS ESTIMATED THAT 𝐸𝑂𝑄 =


2 × 50,000 𝑢𝑛𝑖𝑡𝑠 × 𝑅𝑠. 400
𝑅𝑠. 1.90 + (𝑅𝑠. 30 × 15%)
DURING THE COMING YEAR SHAHBAZ AUTO INDUSTRY WILL BUY
50,000 UNITS OF A CERTAIN COMPONENTS AT A PRICE OF RS. 30
40,000,000
PER UNIT. ANNUAL STORAGE COST PER UNIT IS ESTIMATED AS RS. 𝐸𝑂𝑄 =
6.4
1.90 PER UNIT. IT IS POLICY OF THE COMPANY TO IMPUTE 15%
INTEREST ON CAPITAL INVESTED IN INVENTORY. ORDERING COST IS 𝐸𝑂𝑄 = 6.250,000
EXPECTED TO BE RS. 400 PER ORDER. PRESENTLY THE COMPANY BUYS
𝐸𝑂𝑄 = 2,500 UNITS
IN FOUR QUARTERLY ORDERS OF 12,500 UNITS.

REQUIRED:

(1) ECONOMIC ORDER QUANTITY.

(2) SAVING FOR THE COMING YEAR IF THE COMPANY BUYS IN


ECONOMIC ORDER QUANTITY.
• (2) CALCULATION OF SAVING:

CONTINUE Annual
Requiremen
Order Size No. of
Orders
Ordering
Cost
Average
Inventory
Carrying
Cost
Total Cost

t
50,000 12,500 unit 4 1600 6,250 units 40,000 41,600
units
50,000 2,500 units 20 8000 1,250 units 8,000 16,000
units
Saving Per Year 25,600

• NOTES:
1) NUMBER OF ORDERS = ANNUAL REQUIREMENT ÷ ORDER SIZE
2) ORDERING COST = NUMBER OF ORDERS × RS. 400 PER ORDER
3) AVERAGE INVENTORY = ORDER SIZE / 2
4) CARRYING COST = RS. 1.90 + (RS. 40 × 20%) = RS. 6.4 × UNITS IN
AVERAGE INVENTORY
5) TOTAL COST = ORDERING COST + CARRYING COST
INVENTORIES LEVELS

ADVANCED COST & MANAGEMENT ACCOUNTING


COM-604
LECTURER SARMED RAZA (UAF)
INVENTORY LEVELS

(1) ORDER LEVEL:


MINIMUM LEVEL = (MAXIMUM DAILY CONSUMPTION − AVERAGE DAILY
ORDER LEVEL = MAXIMUM CONSUMPTION DURING LEAD TIME CONSUMPTION) × NUMBER OF LEAD TIME DAYS
OR
ORDER LEVEL = MAXIMUM DAILY CONSUMPTION × NUMBER OF LEAD TIME DAYS
(3) MAXIMUM LEVEL:
MAXIMUM LEVEL = ORDER POINT − MINIMUM CONSUMPTION DURING LEAD TIME
+ EOQ
ORDER LEVEL = (AVERAGE CONSUMPTION DURING LEAD TIME + SAFETY STOCK) OR
OR MAXIMUM LEVEL = ORDER POINT − (MINIMUM DAILY CONSUMPTION × NUMBER
ORDER LEVEL = (AVERAGE DAILY CONSUMPTION × NUMBER OF LEAD TIME DAYS) + OF LEAD TIME DAYS) + EOQ
SAFETY STOCK
(4) DANGER LEVEL:
(2) MINIMUM LEVEL:
DANGER LEVEL = AVERAGE CONSUMPTION DURING LEAD TIME TO GET URGENT
MINIMUM LEVEL = ORDER POINT − AVERAGE CONSUMPTION DURING LEAD TIME SUPPLIES
OR OR
MINIMUM LEVEL = ORDER POINT − (AVERAGE DAILY CONSUMPTION × NUMBER DANGER LEVEL = AVERAGE DAILY CONSUMPTION × NUMBER OF LEAD TIME DAYS
OF LEAD TIME DAYS) TO GET URGENT SUPPLIES
• SOLUTION 8-25.

• (1) ORDER LEVEL:

ORDER LEVEL = MAXIMUM CONSUMPTION DURING LEAD TIME

INVENTORY LEVELS ORDER LEVEL = 120 KG × 7 DAYS

ORDER LEVEL = 840 KG

• (2) MINIMUM LEVEL:

8-25. INVENTORY LEVELS. WITA INDUSTRY HAS DEVELOPED MINIMUM LEVEL = ORDER LEVEL − AVERAGE CONSUMPTION DURING LEAD TIME
FOLLOWING DATA TO ASSIST IN CONTROLLING ONE OF ITS
MINIMUM LEVEL = 840 KG – (100 KG × 7 DAYS)
INVENTORY ITEMS:
MINIMUM LEVEL = 840 – 700
ECONOMIC ORDER QUANTITY ……………...……… 1,000 KG
MINIMUM LEVEL = 140 KG
AVERAGE DAILY USE ……………………………...…… 100 KG
• (3) MAXIMUM LEVEL:
MINIMUM DAILY USE ………………………….………... 80 KG
MAXIMUM LEVEL = ORDER LEVEL – MINIMUM CONSUMPTION DURING LEAD TIME + EOQ
MAXIMUM DAILY USE ……………………..……...…… 120 KG
MAXIMUM LEVEL = 840 KG – (80 KG × 7 DAYS) + 1,000 KG
LEAD TIME ……………………………...…………..…... 7 DAYS
MAXIMUM LEVEL = 840 – 560 + 1,000
REQUIRED: (1) ORDER POINT
MAXIMUM LEVEL = 280 + 1,000
(2) MINIMUM INVENTORY LEVEL
MAXIMUM LEVEL = 1,280 KG
(3) MAXIMUM INVENTORY LEVEL
• SOLUTION 8-27

• (1) ORDER LEVEL:

ORDER LEVEL = MAXIMUM CONSUMPTION DURING LEAD TIME

INVENTORY LEVELS ORDER LEVEL = 30 UNITS × 50 DAYS

ORDER LEVEL = 1,500 UNITS

• (2) MINIMUM LEVEL:

MINIMUM LEVEL = ORDER LEVEL − AVERAGE CONSUMPTION DURING LEAD TIME


8-27. INVENTORY LEVELS, VARYING LEAD TIME. FROM THE
40 + 50
FOLLOWING YOU ARE ASKED TO COMPUTE. MINIMUM LEVEL = 1,500 UNITS – 20 𝑢𝑛𝑖𝑡𝑠 × 𝑑𝑎𝑦𝑠
2
1) ORDERING POINT
MINIMUM LEVEL = 1,500 – 900
2) MINIMUM LIMIT
MINIMUM LEVEL = 600 UNITS
3) MAXIMUM LIMIT
4) DANGER LIMIT • (3) MAXIMUM LEVEL:

AVERAGE DAILY REQUIREMENT ……...……………………... 20 UNITS MAXIMUM LEVEL = ORDER LEVEL – MINIMUM CONSUMPTION DURING LEAD TIME + EOQ

TIME REQUIRED FOR THE RECEIPT ………..……….…. 40 TO 50 DAYS MAXIMUM LEVEL = 1,500 UNITS – (10 UNITS × 40 DAYS) + 1,000 UNITS

ECONOMIC ORDER QUANTITY ………….…………….... 1,000 UNITS MAXIMUM LEVEL = 1,500 – 400 + 1,000

MAXIMUM DAILY CONSUMPTION ………...……….………. 30 UNITS MAXIMUM LEVEL = 2,100 UNITS

MINIMUM DAILY CONSUMPTION …..…………..…………... 10 UNITS • (4) DANGER LEVEL:

TIME TO GET EMERGENCY SUPPLY …………………………... 5 DAYS DANGER LEVEL = AVERAGE CONSUMPTION DURING LEAD TIME TO GET URGENT SUPPLIES

DANGER LEVEL = 20 UNITS × 5 DAYS

DANGER LEVEL = 100 UNITS


• SOLUTION 8-28.

INVENTORY LEVELS • (A) ORDER LEVEL:

ORDER LEVEL = MAXIMUM CONSUMPTION DURING LEAD TIME

ORDER LEVEL = 26,000 UNITS × 1 MONTH

8-28. INVENTORY LEVELS. INDUS INDUSTRIES HAS PREPARED ORDER LEVEL = 26,000 UNITS
FOLLOWING CONSUMPTION FORECAST OF MATERIAL ‘M’ FOR THE
SECOND HALF YEAR: • (B) MINIMUM LEVEL:
MONTH CONSUMPTION MINIMUM LEVEL = ORDER LEVEL – AVERAGE CONSUMPTION DURING LEAD TIME
JULY …………………………………………………….... 22,200 UNITS
145,200 𝑢𝑛𝑖𝑡𝑠
MINIMUM LEVEL = 26,000 UNITS – × 1 𝑚𝑜𝑛𝑡ℎ
6 𝑚𝑜𝑛𝑡ℎ𝑠
AUGUST …………………………………………………. 24,000 UNITS

SEPTEMBER ……………………………………………...... 23,500 UNITS MINIMUM LEVEL = 26,000 − 24,200

OCTOBER ……………………………………………..…. 24,500 UNITS MINIMUM LEVEL = 1,800 UNITS

NOVEMBER …………………………………………..…... 26,000 UNITS • (C) MAXIMUM LEVEL:

DECEMBER …………………………………………...…... 25,000 UNITS MAXIMUM LEVEL = ORDER LEVEL – MINIMUM CONSUMPTION DURING LEAD TIME + EOQ
ITS NORMALLY TAKES 30 DAYS TO RECEIVE THE CONSIGNMENT OF MAXIMUM LEVEL = 26,000 UNITS – (22,200 UNITS × 1 MONTH) + 32,000 UNITS
MATERIAL ‘M’ AFTER THE ISSUE OF A PURCHASE REQUISITION.

REQUIRED: MAXIMUM LEVEL = 26,000 − 22,200 + 32,000

(A) THE ORDER POINT FOR THE SECOND HALF OF THE YEAR. MAXIMUM LEVEL = 3,800 + 32,000

(B) THE MINIMUM INVENTORY FOR THE SECOND HALF OF THE YEAR. MAXIMUM LEVEL = 35,800 UNITS

(C) THE MAXIMUM INVENTORY FOR THE SECOND HALF OF THE YEAR
ASSUMING THE STANDARD ORDER QUANTITY AS 32,000 UNITS.
• SOLUTION 8-29.

• (1) ORDER LEVEL:

ORDER LEVEL = MAXIMUM CONSUMPTION DURING LEAD TIME


INVENTORY LEVELS ORDER LEVEL =
100 𝑝𝑖𝑒𝑐𝑒𝑠
× 2 𝑤𝑒𝑒𝑘𝑠
4 𝑤𝑒𝑒𝑘𝑠

ORDER LEVEL = 50 PIECES

• (2) MINIMUM LEVEL:


8-29. INVENTORY LEVELS. THE AVERAGE DAILY REQUIREMENT OF
6” DIAMETER DISH-SHAPED GRINDING WHEEL IS 3 PIECES. TIME MINIMUM LEVEL = ORDER LEVEL – AVERAGE CONSUMPTION DURING LEAD TIME
REQUIRED TO SECURE DELIVERY FROM THE USUAL SUPPLIER IS 2 MINIMUM LEVEL = 50 PIECES – (3 PIECES × 6 DAYS × 2 WEEKS)
WEEKS. FROM THE RECORDS OF NOVELTY TOOLS WORKS, IT IS
FOUND THAT MAXIMUM REQUIREMENT OF THE WHEEL IN ANY MINIMUM LEVEL = 14 PIECES
MONTH OF 4 WEEKS DOES NOT EXCEED 100 PIECES AND
• (3) MAXIMUM LEVEL:
MINIMUM REQUIREMENT DURING ANY SUCH PERIOD IS NOT LIKELY
TO FALL BELOW 50 PIECES. MAXIMUM LEVEL = ORDER LEVEL – MINIMUM CONSUMPTION DURING LEAD TIME + EOQ

YOU ARE ASKED TO FIX MINIMUM AND MAXIMUM LIMITS AND 50 𝑝𝑖𝑒𝑐𝑒𝑠
MAXIMUM LEVEL = 50 PIECES – × 2 𝑤𝑒𝑒𝑘𝑠 + 60
4 𝑤𝑒𝑒𝑘𝑠
ALSO THE ORDERING LEVEL. ASSUME THE ECONOMIC ORDER
QUANTITY TO BE 5 DOZEN. IF 2 DAYS ARE SUFFICIENT TO RECEIVE MAXIMUM LEVEL = 50 – 25 + 60
EMERGENCY SUPPLY, FIX ALSO THE DANGER LEVEL.
MAXIMUM LEVEL = 85 PIECES

• (4) DANGER LEVEL:

DANGER LEVEL = AVERAGE CONSUMPTION DURING LEAD TIME TO GET URGENT SUPPLIES

DANGER LEVEL = 3 PIECES × 2 DAYS

DANGER LEVEL = 6 PIECES


• SOLUTION 8-30.

• ORDER LEVEL:

INVENTORY LEVELS ORDER LEVEL = MAXIMUM CONSUMPTION DURING LEAD TIME


2,500 𝑟𝑒𝑎𝑚𝑠
ORDER LEVEL = × 15 DAYS
30 𝑑𝑎𝑦𝑠

ORDER LEVEL = 1,250 REAMS

8-30. INVENTORY LEVELS. FROM THE BOOKS AND RECORDS OF • MINIMUM LEVEL:
IQBAL ART PRESS IT IS FOUND THAT AVERAGE DAILY REQUIREMENT MINIMUM LEVEL = ORDER LEVEL – AVERAGE CONSUMPTION DURING LEAD TIME DAYS
OF 20 × 30 – 90 GM. ART PAPER IS 50 REAMS. MAXIMUM
MINIMUM LEVEL = 1,250 REAMS – (50 REAMS × 15 DAYS)
MONTHLY REQUIREMENT OF THE ART PAPER DOES NOT EXCEED
2,500 REAMS AND MINIMUM REQUIREMENT DURING ANY MONTH MINIMUM LEVEL = 1,250 – 750
IS NOT LIKELY TO FALL BELOW 1,000 REAMS. TIME REQUIRED TO
MINIMUM LEVEL = 500 REAMS
SECURE DELIVERY FROM SUPPLIER IS USUALLY 15 DAYS.
ECONOMIC ORDER QUANTITY IS 1,200 REAMS. • MAXIMUM LEVEL:

REQUIRED: DETERMINE MINIMUM AND MAXIMUM LIMITS AND MAXIMUM LEVEL = ORDER LEVEL – MINIMUM CONSUMPTION DURING LEAD TIME + EOQ
ALSO ORDER LEVEL. IF THREE DAYS ARE SUFFICIENT TO RECEIVE MAXIMUM LEVEL = 1,250 REAMS –
1,000 𝑟𝑒𝑎𝑚𝑠
× 15 𝑑𝑎𝑦𝑠 + 1,200 REAMS
30 𝑑𝑎𝑦𝑠
EMERGENCY SUPPLY, DETERMINE DANGER LEVEL ALSO.
MAXIMUM LEVEL = 1,250 – 500 + 1,200

MAXIMUM LEVEL = 1,950 REAMS

• DANGER LEVEL:

DANGER LEVEL = AVERAGE CONSUMPTION DURING LEAD TIME TO GET URGENT SUPPLIES

DANGER LEVEL = 50 REAMS × 3 DAYS

DANGER LEVEL = 150 REAMS


• SOLUTION 8-32.

• ORDER LEVEL:

INVENTORY LEVELS ORDER LEVEL = AVERAGE CONSUMPTION DURING LEAD TIME + SAFETY STOCK

ORDER LEVEL = (70 PIECES × 10 DAYS) + 140 PIECES

ORDER LEVEL = 840 PIECES

8-32. INVENTORY LEVELS. SALMAN MANUFACTURING CO. USES • MINIMUM LEVEL:


A MATERIAL Y FOR MANUFACTURING OF A PRODUCT.
MINIMUM LEVEL = ORDER LEVEL – AVERAGE CONSUMPTION DURING LEAD TIME
FOLLOWING DATA OF MATERIAL Y ARE OBTAINED FROM
COMPANY’S RECORDS: MINIMUM LEVEL = 840 PIECES – (70 PIECES × 10 DAYS)

LEAD TIME ……………………………………………… 10 DAYS MINIMUM LEVEL = 840 – 700

MAXIMUM REQUIREMENT PER DAY …………………. 100 PIECES MINIMUM LEVEL = 140 PIECES

MINIMUM REQUIREMENT PER DAY …………...………. 40 PIECES • MAXIMUM LEVEL:

AVERAGE REQUIREMENT PER DAY ……………………. 70 PIECES MAXIMUM LEVEL = ORDER LEVEL – MINIMUM CONSUMPTION DURING LEAD TIME + EOQ

ECONOMIC ORDER QUANTITY .………………….... 1,000 PIECES MAXIMUM LEVEL = 840 PIECES – (40 PIECES × 10 DAYS) +1,000 PIECES

THE COMPANY MAINTAINS A SAFETY STOCK OF 140 PIECES. MAXIMUM LEVEL = 840 – 400 + 1,000

YOU ARE REQUIRED TO DETERMINE THE FOLLOWING: MAXIMUM LEVEL = 1,440 PIECES
1) ORDERING LEVEL
• DANGER LEVEL:
2) MINIMUM LEVEL
DANGER LEVEL = AVERAGE CONSUMPTION DURING LEAD TIME TO GET URGENT SUPPLIES
3) MAXIMUM LEVEL
4) DANGER LEVEL IF TIME REQUIRED FOR EMERGENCY DANGER LEVEL = 70 PIECES × 1 DAY
SUPPLIES IS ONE DAY. DANGER LEVEL = 70 PIECES