Question

COST ACCOUNTING - COST ESTIMATION AND MATERIALS CONTROL

1. Pluto Company has developed the following data to assist in controlling one of its materials inventory items

EOQ	1,000 liters
Average daily use	100 liters
Maximum daily use	120 liters
Working days per year	250 days
Safety stock	140 liters
Cost of carrying inventory	P1 per liter per year
Lead time	7 days

What is the reorder point?

What is the average inventory?

what is the maximum inventory assuming normal lead time and usage?

Answer 1

1) calculation of reorder point :

reorder point = safety stock + lead time consumption

reorder point = 140 liters + (100 liters x 7 days) = 840 litres

lead time consumption = Average daily use x lead time = 100 liters x 7 days = 700 litres

2) calculation of average inventory :

average inventory = minimum level or safety stock + 1/2 of EOQ

average inventory = 140 liters + (1/2 x 1000 liters)

average inventory = 140 liters + 500 liters = 640 liters

3) calculation of maximum level :

maximum level = safety stock + EOQ = 140 liters + 1000 liters = 1140 liters

or

maximum level = reorder level + EOQ - normal usage during the lead time or lead tiem consumption

maximum level = 840 liters + 1000 liters - (100 liters x 7 days) = 1840 litres - 700 litres = 1140 liters

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