Vaibhav Industries Ltd. uses chemical-A in one of its finished products. The chemical-A is purchased from a vendor outside India. The company…

Working Note 1: Risk of being out of stock Delivery Time Percentage of currency (%) Cumulative percentage of occurrence (%) Risk Of non Occurrence (%) 12 days 70 70 30 13 days 10 80 20 14 days 10 90 10 15 days 5 95 5 16 days 5 100 0 Working Note 2: (a) Ordering cost per order (O)- ₹ 35,000 (b) Cost per liter of Chemical - A ₹ Rate per liter 900 Add: import duty@10% 90 990 Carrying cost per liter per annum of Chemical-A 1.7676% (1.5% + 0.2676%) of 990 = ₹17.50 (i) Economic Order Quantity (E.O.Q) EOQ = √(2AC/C) = √(2 × 36,000 ltrs. × 35,000 / 17.50) = 12,000 litres (ii) Safety Stock at 10% risk of being out of stock Safety stock required for two days i.e. for 13th and 14th day Per day consumption = 36,000 Ltr. / 360 days = 100 litres Safety stock = 100 × 2 days = 200 litres Re-Order Point = Safety Stock + Average lead time x Average consumption = 200 +12 x 100 = 1400 liters. (iii) At 5% risk of being out stock, safety stock will be safety stock for three days 100 liters x 3 days = 300 liters Total Ordering cost = (36,000 Ltr. / 12,000 Ltr.) × ₹ 35,000 = ₹ 1,05,000 Total Carrying cost of inventory = (Safety stock. + Average inventory) × Carrying cost per liter per annum = (300 + (12,000 ltr./2)) × ₹ 17.50 = ₹ 1,10,250 Total cost of ordering & carrying inventory = 1,05,000 + 1,10,250 = ₹2,15,250 [Note: Amount of ₹ 1,75,000 incurred on making agreement for material supply will be apportioned over the entire quantity of 36,000 ltr and included with cost of Chemical-A. However, for the purpose of calculating carrying cost i.e. storage cost and insurance cost, only invoice cost of material is taken. Invoice cost consists of cost per liter of chemical-A plus import duty.]