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

Mehta Auto Ltd uses 600 units of a part per week (52 weeks a year). Lead time is normally 4 weeks but can be as long as 6 weeks; the minimum consumption is 400 units per week. Maximum consumption is 800 units per week. What is the reorder level using maximum consumption and maximum lead time?

The reorder level is 4,800 units, found by multiplying maximum weekly consumption of 800 units by maximum lead time of 6 weeks. Options using average usage or normal lead time understate the level needed to avoid a stockout.

  1. A2,400 units
  2. B3,600 units
  3. C4,800 unitsCorrect
  4. D3,200 units

Explanation

Reorder level = maximum consumption x maximum lead time = 800 x 6 = 4,800 units. Using average consumption and normal lead time gives 600 x 4 = 2,400, which is the wrong base. Using 600 x 6 = 3,600 mixes average usage with maximum lead time; 800 x 4 = 3,200 mixes maximum usage with normal lead time.

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