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

Gupta Traders uses 14,400 units a year. Ordering cost is Rs 100 per order and carrying cost is Rs 2 per unit per year. Lead time is 10 days, and the firm works on a 360-day year with uniform usage. At what stock level (reorder level) should a new order be placed, with no safety stock?

Reorder level equals daily usage multiplied by lead time when there is no safety stock. Daily usage is 14,400 divided by 360, which is 40 units, and multiplied by 10 days it gives 400 units. A fresh order should be placed when stock falls to 400 units.

  1. A200 units
  2. B400 unitsCorrect
  3. C600 units
  4. D1,440 units

Explanation

Daily usage = 14,400 / 360 = 40 units. Reorder level = daily usage x lead time = 40 x 10 = 400 units. Choosing 200 would wrongly use a 5-day lead time, and 1,440 would use annual usage divided by 10.

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