Question

17. Suresh Pipes Limited uses about 75.000 valves per year and the usage is
fairly constant 6250 per month. The valves cost 1.50 per unit when
bought in quantities and the carrying cost is estimated to be 20% of average
inventory investment on the annual basis. The cost to place an order and
process the delivery is 18. It takes 45 days to receive delivery from the
date of an order and a safety stock of 3.200 valves is desired
You are required to determine : () The most economical order quantity and
frequency of orders (1) The order point; and (ii) The most economical order
quantity if the valves cost? 4.50 each instead of? 1.50 each.​

Answer 1

Answer:

Use This Method

(i) Re-order quantity (ROQ) = AnnumPerUnitPerCostCarryingCostOrderingReqAnnual2××Annual Req = Weekly Req ×52 = 275 ×52 = 14,300 Ordering Cost = 100 Carrying Cost = 20% per annum = 20% ×10 = 2 ROQ = 2100143002××= 1.196 Kg.

Reorder Level (ROL) = Maximum Usage ×Maximum Reorder Period Reorder Period = 4 to 8 weeks Maximum Reorder Period = 8 Weeks Consumption = 100 Kg. to 450 Kg. Maximum Consumption = 450 Kg. Reorder Level = 450 ×8 = 3,600 Kg. Maximum Level = ROL + ROQ – (Minimum usage ×Minimum Reorder Period) = 3,600 + 1,196 – (100×4) = 4,796 – 400 = 4,396 Kg. (iii) Minimum Level = ROL – (Normal usage ×Normal Reorder Period) Normal Usage = (Maximum Usage + Minimum Usage)/2 = (450 + 100)/2 = 275 Normal Reorder Period = (Maximum Period + Minimum Period)/2 = (4 + 8)/2 = 6 Minimum Level = 3600 – ( 275 ×6)/2 = 1,950 Kg. (iv) Average Level = (Maximum Level + Minimum Level)/2 = (4,396 + 1,950)/2 = 3173 Kg. Or = Minimum Stock Level + ½ of 1,196 = 2,548 Kg.