CA Intermediate · Financial Management and Strategic Management · Management of Inventory
Anand Auto Ltd has a lead time of 10 days, maximum daily usage of 60 units and normal daily usage of 50 units. The maximum lead time is 14 days. Which of the following is the reorder level under the maximum-usage, maximum-lead-time method, and the minimum stock level if normal usage is 50 units/day and normal lead time is 10 days?
The reorder level is maximum daily usage times maximum lead time, 60 x 14 = 840 units. The minimum stock level is the reorder level less normal usage during normal lead time, 840 - 500 = 340 units.
- AReorder level 840 units; minimum level 340 unitsCorrect
- BReorder level 600 units; minimum level 340 units
- CReorder level 840 units; minimum level 500 units
- DReorder level 700 units; minimum level 340 units
Explanation
Reorder level = maximum usage x maximum lead time = 60 x 14 = 840 units. Minimum level = reorder level - (normal usage x normal lead time) = 840 - (50 x 10) = 340 units. Using 60 x 10 = 600 ignores maximum lead time.
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