CA Intermediate · Cost and Management Accounting · Material Cost
A firm's material has a normal usage of 120 units per day, maximum usage of 150 units per day and minimum usage of 90 units per day. Lead time ranges from 8 to 12 days, with a normal of 10 days. What is the reorder level using the maximum usage and maximum lead time?
Reorder level is maximum daily usage multiplied by maximum lead time, which is 150 units times 12 days, giving 1,800 units. Using normal figures would give only 1,200 units, and mixing maximum usage with normal lead time gives 1,500 units.
- A1,200 units
- B1,500 units
- C1,800 unitsCorrect
- D1,350 units
Explanation
Reorder level = maximum usage x maximum lead time = 150 x 12 = 1,800 units. Using normal usage and normal lead time would give 1,200 units, which is a different level, and 150 x 10 gives 1,500.
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