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170 Financial Management
Ordering cost per order: Rs. 150
Inventory carrying cost is 20% of the average inventory.
Solution
Inventory =
2AO
C
A = 36,000 units
O = Rs. 150
C = 20% of 54×10×8
2×36,000×150 = 1,000 units
EOQ = 1,000 units
Exercise 2
From the following information calculate, (1) Re-order level (2) Maximum level
(3) Minimum level (4) Average level
Normal usage: 100 units per week
Maximum usage: 150 units per week
Minimum usage: 50 units per week
Re-order quantity (EOQ) 500: units
Log in time: 5 to 7 weeks
Solution
(1) Re-order Level
= Maximum consumption × Maximum Re-order period
= 150×7=1050 units
(2) Maximum Level
= Re-order level+Re-order quantity
–( Minimum consumption×Minimum delivery period)
= 1050 + 500 – (50 × 5) = 1300 units
(3) Minimum Level
= Re-order level – (Normal consumption×Normal delivery period)
= 1050 – (100 × 6 ) = 450 units
(4) Average Level
=
=
Maximum level + Minimum level
2
1300 + 450
= 875 units.
2