CA Intermediate · Cost and Management Accounting · Material Cost
Anand Engineering uses a material at 400 units per day. Lead time ranges from 6 to 10 days, with a normal lead time of 8 days. Usage may vary between 300 and 500 units per day. What is the reorder level using maximum consumption and maximum lead time?
Reorder level is maximum consumption rate multiplied by maximum lead time. That is 500 units per day times 10 days, giving 5,000 units. Using normal consumption and normal lead time would give only 3,200 units, which is not the maximum-based level.
- A3,200 units
- B4,000 units
- C5,000 unitsCorrect
- D3,000 units
Explanation
Reorder level = maximum consumption x maximum lead time = 500 x 10 = 5,000 units. Option 3,200 uses normal usage and normal lead time (400 x 8), which ignores the maximum figures required.
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