SELF ASSESSMENT PROBLEMS

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1 CHAPTER2 MATERIALS COST SELF ASSESSMENT PROBLEMS LEVELS OF INVENTORY Q67: Two components, A and B are used as follows: Normal Usage 50 units per week each Minimum Usage 25 units per week each Maximum Usage 75 units per week each Re-Order Quantity A:300 units, B:500 units. Re-Order Period A:4 to 6 weeks, B:2 to 4 weeks Calculate for each component: (a) Re-Order Level, (b) Minimum Level, (c) Maximum Level and (d) Average Stock Level. (CA Inter May 1995 Adapted) [Ans: (a) A: 450 units, B 300 units; (b) A: 200 units, B: 150 units; (c) A: 650 units, B: 750 units; (d) A: 425 units, B:450 units] Q68: In manufacturing its products a company uses three raw materials A, B, C in respect of which the following apply: Raw Materials Usage per unit of product Re-Order Quantity Price per ` Delivery Period (Weeks) Order Level Minimum Level A 10 10, to 3 8,000 - B 4 5, to 5 4,750 - C 6 10, to 4-2,000 Weekly production varies from 175 to 225 units, averaging 200. What would you expect the quantities of the following to be: (a) Minimum Stock of A, (b) Maximum Stock level of B, (c) Re-Order Level of C, and (d) Average Stock Level of A? (CA Inter Nov 1989) [Ans: (a) 4,000 kg; (b) 7,650 kg;(c) 5,400 kg or 5,600 kg;(d) 9,000 kg or 10,125 kg] Q69: If the minimum stock level and average stock level of raw-material A are 4,000 and 9,000 units respectively, find out its Re-Order Quantity. (CA Inter May 1997) [Ans: 10,000 units]

2 Q70: A company has a 5,000 gallon-tank to store a chemical. When the contents of the tank become low, deliveries are made direct from a major chemical manufacturer. The past record shows the following details about the lead time: Lead Time No. of Occasions 0-2 days days days days days 5 If the usage is 200 gallons per day, calculatei. Mean Lead Time Demand ii. Reorder Point iii. Safety Stock [Ans: i. 1,000 gallons; ii gallons; iii. 1,000 gallons] Q71: The scrutiny of past records gives the following distributions for lead time and daily demand during lead time. Lead Time Distribution Lead Time (Days) Frequency Demand Distribution Demand/Day (Units) Frequency Assuming that the lead time distribution and daily demand distribution are independent, determine: (i) The Reorder Level; (ii) The Buffer-Stock; and [Ans: (i) 70 units, (ii) 52 units] LEVELS OF INVENTORY & REORDER QUANTITY Q72: Primex Limited produces product P. It uses annually 60,000 units of a material Rex costing `10 per unit. Other relevant information are: Cost of placing an order `800 per order Carrying cost 15% per annum of average inventory Re-order period 10 days Safety stock 600 units The company operates 300 days in a year. You are required to calculate: (i) Economic Order Quantity for material Rex. (ii) Re-order Level. (iii) Maximum Stock Level. (iv) Average Stock Level. (CA IPCC Nov 2013) [Ans: (i) EOQ = 8,000 units; (ii) 2,600 units; (iii) 8,600 units; (iv) 4,600 units] Q73: Muffins pastry shop supplies a number of products of bakers and confectioners. One of their popular products is "cake decoration."the cake decorations are sold in packets of twelve decorations for `20 per packet. The demand for cake decorations is constant over a long period of time at the rate of 2,000 packets per month. Each packet costs Muffins pastry shop `10 from the manufacturer

3 and a lead time of three days is involved in it. Ordering cost is `1.20 per order and the holding cost is 10% per annum. Calculate: (a) (i) The Economic Order Quantity. (ii) Total cost of ordering and carrying cake decorations per annum, (b) Assume that the present stock level is 200 packets and that no buffer stocks are kept, when should the next order be placed? Assume 360 days in a year. [Ans: (a) (i) 240 Packets; (ii) `240; (iii) Next order should be placed immediately] Q74: Charlie Pump Company uses about 75,000 valves per year and the usage is fairly constant at 6,250 per month. The valves cost `1.50 per unit when purchased in large Quantities and carrying cost is estimated to be 20% of average inventory investment on an annual basis. The cost to place the order and to process the delivery is `18. It takes 45 days to receive delivery from the date of an order and a safety stock of 3,250 valves is desired. You are required to determine: (i) The most Economical Order Quantity and frequency of orders; (ii) The Re-Order Level; and (iii) The Most Economical Order Quantity if valves cost `4.50 each instead of `1.50 each. [Ans: (i) 3,000 valves; 25 orders; (ii) 12,625 valves; (iii) 1,732 valves] Q75: Medical Aids Co. manufactures a special product AID. The following particulars were collected for the year 1987: Monthly Demand of AID 1,000 units. Cost of placing an order - `100. Annual Carrying Cost per unit- `15. Normal Usage - 50 units per week. Minimum Usage 25 units per week. Maximum Usage 75 units per week. Re-Order Period- 4 to 6 weeks Emergency delivery period 3 weeks Compute from the above: (a) Re-Order Quantity, (b) Re-Order Level, (c) Minimum Level, (d) Maximum Level and (e) Average Stock Level. (f) Danger Level. (Adapted CA Inter Nov 1987) [Ans: (a) 186 units; (b) 450 units; (c) 200 units; (d) 536 units; (e) 368 units ; (f) 150 units] Q76: M/s. Tubes Ltd. are the manufacturers of picture tubes for T.V. The following are the details of their operation during 1997: Average Monthly Market Demand Ordering Cost Inventory Carrying Cost Cost of Tubes Normal Usage Minimum Usage 2,000 picture tubes `100 per order 20% per annum `500 per tube 100 tubes per week 50 tubes per week

4 Maximum Usage 200 tubes per week Lead Time to Supply 6-8 weeks Compute from the above: (1) Economic Order Quantity. If the supplier is willing to supply quarterly 1,500 units at a discount of 5%, is it worth accepting? (2) Maximum Level of stock. (3) Minimum Level of stock. (4) Re-Order Level (CA Inter May 1998) [Ans: (1) 102 tubes; Accept the discount offer; (2) 2,800 tubes; (3) 900 tubes; (4) 1,600 tubes] Q77: IPL Limited uses a small casting in one of its finished products. The castings are purchased from a foundry. IPL limited purchases 54,000 castings per year at a cost of `800 per casting. The castings are used evenly throughout the year in the production process on a 360 day per year basis. The company estimates that it costs `9,000 to place a single purchase order and about `300 to carry one casting in inventory for a year. The high carrying costs results from the need to keep the castings in carefully controlled temperature and humidity conditions, and from the high cost of insurance. Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of delivery time and percentage of their occurrence are shown in the following tabulation Delivery Time (days): Percentage of Occurrence: Required: (i) Compute the Economic Order Quantity (EOQ) (ii) Assume the company is willing to assume a 15% risk of being out of stock. What would be the Safety Stock? The Re-Order Point? (iii) Assume the company is willing to assume a 5% risk of being out of stock. What would be the Safety Stock? The Re-Order Point? (iv) Assume 5% stock out risk. What would be the Total Cost of Ordering and Carrying Inventory for one year? (v) Refer to the original data. Assume that using process re-engineering the company reduces its cost of placing a purchase order to only `600. In addition, company estimates that when the waste and inefficiency caused by inventories are considered, the true costs of carrying a unit in stock is `720 per year. a. Compute the new EOQ. b. How frequently would the company be placing an order, as compared to the old purchasing policy? (CA PE II May 2004) [Ans: (i) 1,800 castings ; (ii) Safety stock 150 castings, Re-order point 1,050 Castings; (iii) Safety stock 450 castings, Re-order point1,350 Castings; (iv) Total cost of ordering = `2,70,000, Total cost of carrying = `4,05,000 (v) EOQ = 300 castings, Old policy: Each order is placed after 12 days; New policy: Each order is placed after 2 days] ECONOMIC ORDER QUANTITY Q78: Calculate the Economic Order Quantity from the following information. Also state the number of orders to be placed in a year. Consumption of Materials per annum 10,000kg. Order placing cost per order `50

5 Cost per kg. of Raw Materials `2 Storage Costs 8% on average inventory [Ans: (a) EOQ = 2,500kg; (b) No. of orders = 4 orders] Q79: The following information is available about XYZ Company which manufactures Electric Fans. The company has an average total inventory of `200 lakhs and places 12,000 orders every year. Procurement Costs `4,00,000 Purchase Department Expenses `4,00,000 Stores Personnel Salaries `4,00,000 Obsolescence, Spoilage, etc. `1,20,000 Floor Space Charge Related to Stores Activities `2,80,000 Cost of Collecting Material `80,000 Cost of Receiving Material `70,000 Cost of Inspection `1,00,000 Cost of Material Handling for storing Activities `3,00,000 Cost of Bill Payment `1,50,000 Interest 12.5% Insurance Charges 2% The company wants to buy a certain component, whose price is `24 each and the annual requirement is 34,560 units. Calculate cost of placing an order, cost of carrying inventory as a % of inventory value and EOQ. [Ans: Ordering Cost = `100 per order; Cost of carrying inventory as a % of Inventory = 20 %; EOQ = 1,200 units] Q80: The annual demand for raw material R is 4,000 units and the purchase price is expected to be `90 per unit. The incremental cost of processing an order is `135 and the cost of storage is estimated to be `12 per unit p.u. (a) What is the optimal order quantity and the total relevant cost of this order quantity? (b) Suppose that `135 estimate of the incremental cost of processing an order is incorrect and should have been `80. Assume that all the other estimates are correct. What is the cost of this prediction error assuming that the solution to part (a) is implemented for one year? (c) Assume at the start of the period, a supplier offers 4,000 units at a price of `86. The materials will be delivered immediately and placed in the stores. Assume that the incremental cost of placing this order is zero and the original estimate of `135 for placing an order for the economic batch size is correct. Should the order be accepted? (d) Prepare a Performance Report for the Supply Manager - the budget is based on the data presented in (a) above and his actual performance was based on (c) above and he accepted the order. [Ans: (a) 300 units, `3,600; (b) `96; (c) Reject the proposal; (d) Adverse Performance `4,400] Q81: Your factory buys and uses a component for production at `10 per piece. Annual requirement is 2,000 numbers. Carrying cost of inventory is 10% p.a. and the ordering cost is `40 per order. The purchase manager agrees 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 for 2,000 number at a time, we get a 3% discount from the supplier. Evaluate this proposal and make your recommendations. [Ans: No, Purchase manager s proposal should not be accepted as it requires extra cost of `10 p.a.] Q82: The Purchase Department of your organisation has received an offer of quantity discounts on its orders of materials as under:

6 Price per tonne Tonnes 1,200 Less than 500 1, 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 `1,200 and the stock holding cost is estimated at 20% of material cost per annum. You are required to advise the Purchase Department the most economical purchase level assuming order quantity desired is 400 tonnes, 500 tonnes, 1,000 tonnes, 2,000 tonnes and 3,000 tonnes. (Adapted CA Inter Nov 1990) [Ans: EOQ: 1,000 tonnes] Q83: The Best Breads Company buys and then sells (as Bread) 2.6 million kgs of wheat annually. The wheat must be purchased in multiples of 2000 kgs. Ordering cost, which include grain elevator removal charges of `3,500 are `5,000 per order. Annual carrying cost is 2% of the purchase price per kg of `5. The company maintains a safety stock of 2,00,000 kgs. The delivery time is six weeks. (a) What is the EOQ? (b) At what inventory level should reorder be placed to prevent the drawal on the safety stock? (c) What was the Total Inventory Cost? (d) The wheat processor agrees to pay the elevator removal charges if Best Breads will purchase wheat in quantities of 6,50,000 kgs. Would it be to the Best Breads advantage to order under this alternative? [Ans: (a) 5,10,000 Kg, (b) 5,00,000 Kg, (c) `1,30,70,990; (d) Accept the proposal, Net savings = `12,490] INVENTORY TURNOVER RATIO Q84: Calculate the Material Turnover Ratio for the year 1999 from the following details: Particulars Material X Material Y Opening Stock 25,000 87,500 Closing Stock 15,000 62,500 Purchases 1,90,000 1,25,000 Determine the fast moving material. [Ans: Material X] Q85: The following transactions are extracted from Stores Bin Card relating to a component during the year : Date Receipt (units) Issue (units) Balance (units) Total Consumption 400 Calculate the Inventory Turnover Ratio. [Ans: 4.16 times]

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