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CA Intermediate · Financial Management and Strategic Management · Management of Inventory

Arvind Auto uses 24,000 units a year (300 working days). Lead time is 10 days, safety stock is 500 units, and EOQ is 1,200 units. What is the reorder level, and what is the maximum stock level (assuming the order arrives exactly as stock reaches safety stock)?

Daily usage is 80 units, so lead-time usage is 800. Adding safety stock of 500 gives a reorder level of 1,300 units. Maximum stock is safety stock plus EOQ, which is 500 + 1,200 = 1,700 units.

  1. AReorder level 1,300 units; maximum level 1,700 unitsCorrect
  2. BReorder level 800 units; maximum level 1,700 units
  3. CReorder level 1,300 units; maximum level 1,200 units
  4. DReorder level 1,800 units; maximum level 2,300 units

Explanation

Daily usage = 24,000/300 = 80 units. Lead-time usage = 80×10 = 800. Reorder level = 800 + 500 safety = 1,300. Maximum level = safety stock + EOQ = 500 + 1,200 = 1,700 when stock hits safety stock as the order arrives. Option B forgets to add safety stock in the reorder level.

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