CA Intermediate · Financial Management and Strategic Management · Management of Inventory
Anand Steels uses 100 units of a material daily. Lead time varies from 8 to 12 days, with a normal lead time of 10 days. What is the reorder level based on the maximum consumption and maximum lead time if the maximum daily usage is 120 units?
The reorder level is maximum daily usage multiplied by maximum lead time, which is 120 units times 12 days, giving 1,440 units. Using normal usage and normal lead time would give only 1,000 units, which does not protect against the worst case.
- A1,000 units
- B1,200 units
- C1,440 unitsCorrect
- D1,100 units
Explanation
Reorder level = maximum usage x maximum lead time = 120 x 12 = 1,440 units. Using 100 x 10 gives 1,000, which uses normal figures; 120 x 10 gives 1,200, which mixes maximum usage with normal lead time.
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