CA Intermediate · Financial Management and Strategic Management · Management of Inventory
Annual demand for an item is 3,600 units. Daily usage is uniform over a 360-day year. Lead time is normally 10 days but could be as long as 16 days. Safety stock is set to cover the excess of maximum over normal lead time. What is the reorder level?
The reorder level is 160 units. Daily usage is 10 units, and covering the maximum lead time of 16 days requires 160 units. This equals 100 units for normal lead time plus 60 units of safety stock for the extra 6 days.
- A100 units
- B160 unitsCorrect
- C60 units
- D36,000 units
Explanation
Daily usage = 3,600/360 = 10 units. Reorder level = maximum usage x maximum lead time = 10 x 16 = 160 units. Equivalently, normal-lead-time usage 100 plus safety stock 10 x 6 = 60 gives 160. Choosing 100 ignores safety stock.
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