Chapter6 Inventory Management

Raw materíal required in a year 20,000 units

Purchase price Rs. 20 per kg
Calculatepurchase cost

Q-2 Raw material requirement 1,000 kg per month a, op

Purchase price Rs. 5 per kg
Calculatg annual purchase cost
Ansi(0 6U0%|0s =60,06
Sol-8
Anaeleoqieal (4)
o()
Q-3 Finished product produccd during the year 10,000 units = 0060x2
Raw material required 2Kg per unit of output
Purchase price Rs. 10 per kg
Puchase Cest
Calculate annual purchase cost.

Q-4 Finisthed product produced quarterly 5,000units

Raw material required 3kg per unit of output
Purchase price Rs. 5per kg
Caleulate annual purchase cost

0-5 Annual requirement of raw

Order size
material 1,000
J00 Kg
Kg Na. €sdlrS --
A

Cost per order

Rs. 50 lo Ords
Calculate ordering cost.

0rheir Cos- [Link]

Q-6 Annual requirement raw material 1,000 Kg
Order size
of

500 Kg 10x9- So
Rs. 50
Cost per order
Calculate ordering cost. Ho, 0rded

-Q-7 Annual requirement

Order sizce
20,000 Kg
5,000 Kg
2e
Rs. 8
Cost per order
Purchase price per unit
Rs. 100 Cost 2so100
Carryíng cost Rs. 5 per unit p.a.

Calculate carrying cost and Ordering Cost. [Link] [Link]!

Loill Ceme olown

20,000 Kg Av
Q-8. Annual requiremeni
Order size 1,000 Kg Cayi cos - AVstock-hy
Rs. 100 Lo A

-
Purchase price per unit
1o05d
Carrying cost
Calculate
Co
carrying

Annual requirement 20,000 Kg

cost

-
and Ordering Cost.
9% p.a.
Rs,2
Order size - 5.000 kg
A hck
SoK
Calculate frequency of order

Order size - 20 kg
0 Annual requirement - 2,000 kg
Calculate frequency of order,
Ans I2/4 3m
 Q-11 Finished product produccd during the year 10,000 units
Raw material required 2Kg per unit of output
Purchase price Rs. 10per kg
Cost per order Rs, 100
Carrying cost 20%
Order Size 1,000 Kgs
Calculate:

(i)Purchase cost (i)Ordering cost (ii)Carrying cost (iv) Frequency oforder

Q-12 Requirement of material 20,000Kg

Cost per order
Purchase price per Kg
Rs.
Rs. 100
8
y2da-()2oK 00 Eo
Carrying cost 8%
Calculate: (i) EOQ, () Ordering cost at EOQ (iii) 00
Carrying cost at

Q-13 Requirement of material 20,000 Kg

Cost per order Rs. 8
Order Size 500 Kg
Purchase
Carrying
price

cost
per Kg Rs. 100
8% 605- SK
Calculate: (i) Ordering cost (i) Carrying cost Ans() 320
Q-14 Requirement of material 20,000 Kg
Rs. 8
() (oc)
Cost per order
Order Size J00 Kg
Purchase price per Kg Rs. 100
Carrying cost 8%
Calculate: (1) Ordering cost (i)Carrying

Q-15 Harsha Ltd. produces a product, which has a monthly demand of 4,000 units. The product requíres a
oh Component -X ywhich is purchased at Rs. 20,For every finished product,onc unit of Componcnt -X is
required. The ordering cost is Rs. 120 per order and the holding cost is 10% per annum,

You are requiredto calculate

i. Economic order quantity; and
i. If the minimum lot sizeto be supplied is 4,000 units, what is the extra cost the company has to
incur? ((i) 2,400 units; (i) Extra cost Rs, 640)44tS (CS June 2003; June 2001)

Ihe monthly requirement of acomponent is 4.000 units. The cost perorder is Rs. 1.000 and the arry ing
cost per unit per annumis Rs. 24. The FconomicOrdering Quantity is: k (CS Dec 2018)
Q-17 Ifannual total carying cost, per unit carrying cost and cost per order are Rs. 15,000, Rs. 10 and Rs. 150

respectively, then Economic Order Quantity will be: (CSDec 2018)

Calculate the economic order quantíty from the folowing informationand also state the number of orders

tobe placed in a year.

Consumption of materials per annum 10,000 kgs.
Order PlacingCost Per Order Rs.25

Cost per kg. of raw material Rs.2

Storage Costs = 4% on average inventory

Ahs4 orde (ICSIStudy
(ICSI Study Material)
 i9 ABC Company buys in lots of 125 boxes which is a three [Link] cost per box is Rs 125 and
the ordering cost is Rs. 250 per order. The inventory carrying cost is estimated at 20%of unit value per
[Link] are required to ascertain:
()What is the total annual cost of the existing inventory policy?

(i)How much money would be saved by employing the economic order quantity (EO0?
(CS Dec 1999)

Q-20 Ifthe annual carrying cost of material Z is Rs. 4 per unit and its total carrying cost is Rs. 12,000 p.a. the
economic order quantity of the material is:
(CS Dec 2017)

Q-21 IfEOQ is 200 units, ordering cost is Rs. 20 per order and total purchases is 4,000 units. The carry ing cost
per unit will be: Amsa (CS June 2018)

Q-22 IfEoQ=360 units, order costs are Rs. 5per order, and carrying costs are Rs. 0.20 per units, what is the

usage in units?

per unit
The annual demand for a product is 6,400 units. The unit cost is Rs. 6 and inventory carrying cost
per annum is 25% of the average inventory cost. If the cost of procurement is Rs. 75,determine
i. Economic order quantity (EO): (800 units) M 6 X)S 2x
Number of orders per annum: and (8 orders)
1.
iiL. Time between two consecutive orders. (1.5 months) Dec 1998)

Q-24 Compute E.O.Q from the following:

Annual Demand 5,000 units
Rs. 20.00
Unit price
Order cost Rs. 16.00

Storage rate 2% per annum

Interest rate 12% per annum
Obsolescence rate 6% per annum (CA Study Materia)
2t12,+ 6 )-a0y.
Q-25 The following information relating to a type of Raw material is available: ccpuPa- aa/
Annual demand 2,000 units
Rs. 20
Unit price
Rs. 20
Ordering cost per order
Storagecost 2%p.a.
Interest rate 8%pa
Lead time Half-month

cconomic order quantity and total annual inventory cost of raw material. (CA Nov 2009)
Calculate

From the follow ing information, calculate economic order quantity (ECQ)and the nunmber of orders to be
0-26
placed in one quarter of the year:

Quarterlyconsumption of material :2,000 Kg.

ii.
Cost of placing one order : Rs. 50
111. Cost per unit : Rs. 40
(CS Dec 2011)
iv. Storageand carrying cost: 8% on average inventory.

of each unit Rs. 27. The cost per order is

Q-27 A factory requires 1,500 units of an item per [Link] cost is

of the average inventory. Find out the economic

Rs. 150and inventorycarrying charges work out to 20%
year. Would you accept a 2%
order quantity (EOQ)and ascertain the number of orders to be placed per
minimum supply of 1.200 units? (CS June 2007)
price discount on a
 J-28 Your factory buys and uses a component for productionat Rs. 10 per unit. Annual requirementjs 20,000
units. The carrying cost of inventory is 10% per annum and ordering cost is Rs. 40 per order. The purchase
manager argues that as the ordering cost is very high, it is advantageous to place a single order for the

entire annual requirement. He also says that if we order 20,000 units at a time, we can get a 3% discount

fromthe [Link] are required to evaluate this proposaland make your recommendations.

Q-29
A-Ro
Consider the following data for a certain item purchased by ABC
2475.
Ltd.
(CSDec 2006)

Annual Usage 10,000units

Fixed Cost per order Rs. 750
Purchase Price Rs. 200 per unit
Carrying cost 20 % of inventory value.

a)

b)
What is the economic order quantity?

On the assumption that a trade discount 2 is offered

Sajg3739
if the minimum order size
S (1CSI Study
is 1,000 units,

Material)
should

the company go in forthe tradediscount

A manufacturer requires 1,000 units of a raw material per month. The ordering cost is Rs.15 per order.
Q-30
to be 15% of the average inventory per unit per
• The carrying cost in addition Rs.2 per unitto is estimated
The
priceof the raw material Rs. 10 per unit. Find economic lot size and total cost.
year. The purchase is

a 5% discount in purchase price for orders of 2,000 units more but less than
or
manufacturèr is offered
2% discount of 5,000 more. Which of these three
5.000 nits. A further is available for orders units or

ways of purchase he should select? (ICSI Study Material)T

|26 Td
alternative

Cestot O6 1,2, 13 C EOQ

o) Costat 0U0) /
for one of its components. The components
7sJS
A manufacturingcompany, follows th policy 'of

3 Q-31 Ltd. a

details are as follows:

Purchase price per component Rs. 200

Cost of an order Rs. 100

Annual cost of carrying one unit of inventory 10% of purchase price

Total cost of carrying and ordering inventoryRs. 4,000 per annum.
The company has been offered a discount of 2% on the price of the component provided the lot size is

2000 components at a time.

You are required to calculate:
i. EOQ:
discount offer can be accepted. (Assume the inventory carrying cost does not
ii. Advice whether the quantity

vary according to discount policy).

iii. Would your advice differ if thecompany is o ffered 5%discount on a single orders. (1CSIStudy Material)

an offer of quantity discounts on its order of

Q-32 The purchase department of your organization has received

materials as under:
Tonnes
Price per tonne
Rs.
1,200 Less than 500

1,180 500 and less than 1,000

1,160 1,000 and less than 2,000

1,140 2,000 and less than 3,000
1,120 3.000 and above

The annual requirement for the material is 5,000 tonnes. The delivery cost per order is Rs. 1,200and the
stock holding cost is estimated at 20% ofmaterial cost per annum. You are required to advise the Purchase
Department the most economical purchase level assuming order quantity desired is 400 units, 500 units,
1000 units, 2000 units and 3000 units. (Adapted CA Inter Nov.1990)
Q-33 Ratan Enterprises requires 1,80,000 units of a certain item annually. The cost per unit andthe cost per
purchase order are Rs. 6 and Rs. 600 respectively. The inventory carrying cost is Rs. 6 per unit per year.
i. What is the economic order quantity?
ji. What should the firm do if the supplier offers discount as below:
Order Quantity Discount (%)
9000-11999
12,000 and above 3 (CS June (P)2010)

Q-34 Material –A is used as follows:

Minimum usage •500units per week
Maximum usage 1,500 units per week

Normal usage(Av .usase 1,000 units per week

Ordering quantities Roa bs 1,600 units

Delivery periodLT) 4-6 weeks

Calculate Min
Ordering level/RoL
(CS June 2009)
(i)Maximum level (i) Minimum level (ii)

Q-35 Material X and Y are used ås follows:

Minimum usage 50 units each per week
Maximum usage 150units each per week,
Normal usage 100 units each per week
Ordering quantities
X= 600units
Y =1,000 units
Delivery period
X=4-6 weeks
Y=2-4 weeks

a.
Calculate for each
Maximum level

and
material

(Mat X 1,300 umits Mat Y3001,500

(MatX 400 units; Mat Y units)
;
units )RoLx9ad uut,Y 6o
b. Minimum level
(Study Mlaterial)
level (MatX 900 units; Mat Y 600 units)
C. Ordering
for placing
a machine. A fixed cost of Rs. 50 per order
is incurred

Q-36 A firm requires 50 items every day for is 32 days.

0.02 per day. The lead period
cost per item amounts to Re.
an order. The inventory carrying level.
order quantity; and (ii) re-order
You are required to compute (i) economic (CS Dec 2002)
((i) 500 units (ii) 1,600 units)

The
month. The ofplacing anorder is Rs. 100.
çost
5,000 units ofa product per
Q-37 A company manufactures
period is 4 to 8 weeks
The consumption
10 per kg. The re-order
Rs
purchase price of the raw material
is
The
average consumption being 275Kes.
ofraw naterials varies from |00 Kgsto 450 kgs per week. the
20% per annum. You are required toMaximum
caleulate
is
crrying cost of inventory level

Te ()Re-order quantity(s()
(iv) Minimum
Re-orderlevel
level
stock level.
(ii)

(CA Nov 2002; CS June 2010; June

(V) Average
2012)

carrying cost is Rs. 9,000 per

is-Rs. 3.6 per unit and its total
cost of material X
0-38 The annual carrying 'X", if thereis no safetystock
of material
order quantityfor material
annum. What should be the Economic (CA November, 2008)
X?

(c)What shoula De ut IIYIwy (CAMay 2005)

 Works Ltd. for the year ended
Q-39 The following details are available from the books of Ruby Engineering
31 March, 2005:
Monthly demand (units)
2,000
200
Cost of placing an order (Rs.)
30
Annualcarryingcost (Rs. Per Unit)
100
Normal usage (Units per month)
150
Maximum usage (Unitsper month)
50
Minimum Usage (units per month)
4-6
Re-order period (Weeks)
Based on the above details, calculate –
(ii) Re-order level (207 units)
(i) Re-order quantity (126 units)
level(287 units) (CS June 2006)
(ii) Minimum level (92 units) (iv) Maximum

A. B,Cin respect of which the

a company uses three raw materials
-40 In manufacturing its products
followingapply: Order level Minimum
Re-order Price per Delivery
Raw Usage per
Period Level
materials Unit of Quantity Kg.
Product Kg. Re. (weeks) Kg. Kg

Kg.
0.10 to 3 8.000
A 10 10,000 I

B 4 5,000 0.30 3 to 5 4,750

6 10,000 0.15 2 to 4 2,000

of
225 units, averaging 200. What would you expect the quantities
Weekly production varies from 175 to

the following to be:

Minimum Stock of A, (b) Maximum Stock levelof B,

(a)
Averages Stock levelofA? (CAInter Nov. 1989)
(c) Re-order level ofC, anu (d)

constant at 6,250 valves per

Q-41 Pooja Pipes [Link] about 75,000 valves per year and the usage is fairly
and the carryingcost is estimated
month, The valve costs Rs. 1.50 per unit when bought in large quantities;
basis. The cost to place an order and process the
to be 20%of average inventory investmenton an annual
stock of 3,250
delivery is Rs. 18. It takes 45 days to receive delivery from the date of an order and a safety

valves isdesired.
orders: (i) the re
determine ()the most economical order quantity and frequency
of
You are required to
Rs.4.50 each instead of RS. 50
order point: and (ii) the most economical order quantity if thevalves cost
each. (ICSIStudy Material); (CS Dec 2010)

product "ZE The follow ing particulars were collected tor the vear
Q- 2 SK Enterprise manufactures a special

2004:
Annual consumption 12,000 units (360 days)
Rs.
I
Cost per unit

Ordering cost Rs. 12 per order

24%
Inventory carrying cost
Normal lead time 15 days

Safety stock 30 days consumption

Required:
(a) Re-orderquantity (b) Re-order level
(e)What should be the inventory level (ideally) immediately before the material eorder is reeeived?
(CA May 2005)
3 Following details are related to a manufacturing concern:
Re-order level 1,60,000units
Economic Order Quantity 90,000 units

Minimum stock level 1,00,000 units

Maximum stock level 1,90,000 units
Average lead time 6 days
Difference between minimum lead time and maximum lead time 4 days
Calculate:

(i) Maximum consumption per day (i) Minimum consumption per day (CA November, 2014)

Q-44 Following information is given:

Rs. 20
Cost of placing a purchaseorder
No. of units to be purchased during the year 5,000 Nos.
of transport cost Rs. 50
Purchase price per unit inclusive
Rs. 5
Annual storagecost per unit
Details of lead time:

Average 10days
Maximum 15 days

Minimum 6days
For emergency purchase
4days
Rate of consumption per day:
15 units
Average
Maximum 20 units
level; re-order quantity; (üi) maximum level; (iv) minimum level; and (v)
Calculate-() re-ordering (ii)

danger level.
(CS June 2011)

Q-45 ABC Limited has 7 different items in its inventory. The average number of units in inventorytogether

with their average cost per unit is presented below. Suggest a break-down
of the items into ABC
classification assuming that the Company wants to introduce
ABC InventorySystem.
Items (Nos.) Average number of units in inventory Average cost per unit
12
()
25,000
2 25,000 4
70,000 4
4 30,000 15

5 10,000 110
20.000 50
20,000
(ICST Study Material)
 PRACTICE QUESTIONS
Q-46 Two components X and Y are used as follows:
Normal usage 300 units per week
Maximum usage 450 units per week
Minimum usage 150 units per week
Reorder Quantity X-2,000 units and Y-4,000 units
X–4 to 6 weeks and Y -2
Re-order Period
Calculate for each component
(1)Re-order Level, (2) Maximum
- to

Level, (3) Minimum Level (4) Average Inventory.

4 weeks

(ICSI Study Material)

Q-47 Two components, X and Y, are used as follows:

Normal usage 600 units per week each
Maximum usage 900 units per week each
Minimum usage 300 units per week each
Re-order quantity X, 4,800 units, Y 7,200 units
Re-order period X 4 to 6 weeks, Y 2 to 4 weeks
a) Reorder Level b) Minimum Level c) Maximum Level d) Average Stock
Calculate for each component
Level (ICSI Study Material)

raw material per month. The ordering cost is Rs.15 per order.
Q-48 A manufacturerrequires 1,000 units of a

be 15% of theaverage inventory per unit per

The carrying cost in addition to Rs.2 per unit is estimated to

the raw material is Rs.10 per unit. Find economic lot size and total cost.
year. The purchase price of

(ICSI Study Material)

50,000 units an item each costing Rs.1.20. Each order costs

Q-49 XYZ ElectricalCompany uses annually
of

Rs.45 and inventory carrying cost is 15% of theannual average inventory value.

a) Find the Economic Order Quantity (LT)IO a

b) If the company operates 250 days a year and the procurement time is 10 days and safety stock is 500
units, find the reorder point, maximum, minimum and average inventory.
(ICSIStudy Material)

Q-50 In a company, weekly minimum and maximum consumption of Material

the
A are 25 and 75 units -
respectively. The re-order quantity as fixed by the company
is 300 units Material A is received within 4 -
to 6 weeks from the date of issue of supply order. Calculate minimum level
and maximum level ofMaterial

-A. (Minimum level 200 units; Maximum level 650 units) (CS June 2005)

0-51 PR Tubes Ltd. are the manufactures of picture tubes for T.V. The follow ing are the details of their

operations during 1999-2000:

Ordering Cost Rs. 100 per order

Inventory carrying cost 20% p.a.

Cost of tubes Rs. 500 per tube
Normal usage 100tubes per week
Minimum usage 50 tubes per week
Maximum usage 200 tubes per week
Lead time to supply 6-8 weeks
Required:
() Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a discountof
5%, is it worth accepting?
(i) Re-order level (i) Maximum level of stock (iv) Minimum level of stock (CA May 2000)
2 Primex Limited produces product
unit. Other relevant information
P.
are:
It uses annually 60,000 units ofa material Rex' costing Rs.10 per

Cost of placing an order Rs. 800 per order

Carrying cost 15% per annum of average inventory
10 days
Re-order period[Lao.d pariedd :
Safety stock 600 units

The company operates 300days in a year.

You are required to calculate:

(b)Re-order level
(a) Economic Order Quantity for material 'Rex'.
(d)Average stock level (CA November, 2013)
(c) Maximum stock level

M'which has demand of 8,000 units. The product requires 3kg

Q-53 KL Limited produces product a quarterly

unit of [Link] other information are as follows:

quantity of material 'X° for every finished

Cost of material 'X* Rs.20 per kg.

Rs. 1,000 per order
Cost of placing an order inventory
15% per annum ofaverage
Carrying Cost
You are required:
for material X
(a) Calculate the Economic Order Quantity suppiy the
if he wants to
of 2 percent discount by the supplier,
(b) Should the company accept an offer (CAStudy Material)
annual requirement of material
X° in 4 equal quarterly installments?
are collected for the year ended March,
Ace Ltd. manufactures a product and the following particulars
0-54
2000:
250
Monthly demand (units) Fiuishedgrnd) 100
Cost of placing an order (Rs.) 15
Annual carrying cost (Rs. per unit)
[Link]
t- Normal usage (units per week) Raw Mei
50.

25
Minimum usage (units per week) ConSuþtim 75
Maximum usage (unitsper week) 4-6
Re-order period (weeks)
Youare required to calculate:
(ii)Minimum level (iv)Maximum level
(ii) Re-order level
() Re-order quantity (CS June 2000; Study Material)
(ii) Average stock level.