Following information is extracted from the purchase department of A Ltd.: (i) Number of units to be purchased during the year is 10,000 (ii) Cost…

Basic Data: A (Number of units to be purchased annually) = 10,000 units O (Ordering cost per order) = 40 C (Annual cost of storage per unit) = 5 Purchase price per unit = 80 +20 (Insurance charges) = 100 (Note: Cash discount is treated as an interest and finance item and thus, it is ignored.) Computations: (i) Re-ordering level (ROL) = Maximum usage per period × Maximum lead time = 40 units per day × 30 days = 1,200 units (ii) Maximum level = ROL + ROQ – [Min. rate of consumption × Min. lead time] (Refer to working notes 1 and 2) = 1200 units + 400 units – [20 units per day × 10 days] = 1,400 units (iii) Minimum level = ROL – [Average rate of consumption x Average re-order-period] = 1,200 units – (30 units per day × 20 days) = 600 units (iv) Danger level = Average consumption × Lead time for emergency purchases = 30 units per day × 8 days = 240 units Working Notes: 1. Minimum rate of consumption per day (X) Average rate of consumption = (Minimum rate of consumption + Maximum rate of consumption) / 2 30 units per day = (X units/day + 40 units per day) / 2 Or, X = 20 units per day. 2. Re-order Quantity (ROQ) or Economic Order Quantity (EOQ) = √(2 × 10,000 units × ₹ 40) /5 = 400 units