In a company, weekly minimum and maximum consumption of material A are 25 and 75 units respectively. The reorder quantity as fixed by the company is 300 units. The material is received within 4 to 6 weeks from issue of supply order. Calculate minimum level and maximum level of material A:

Question

Accepted Answer

The correct option is 3:
The solution for Minimum Level and Maximum Level of material A is determined by applying the standard inventory control formulas derived from the provided consumption and lead time data. These levels are critical for effective material management, ensuring that production maintains an optimal safety stock while preventing excessive inventory costs. First, we must establish the Reorder Level (ROL), which is calculated as Maximum Consumption (75 units/week) multiplied by Maximum Reorder Period (6 weeks), giving 450 units. The Minimum Level (safety stock) formula is ROL minus (Average Consumption x Average Reorder Period). With an Average Consumption of (25 + 75) / 2 = 50 units and an Average Reorder Period of (4 + 6) / 2 = 5 weeks, the calculation is 450 - (50 x 5) = 450 - 250 = 200 units. The Maximum Level formula is (ROL + Reorder Quantity) - (Minimum Consumption x Minimum Reorder Period). Substituting the values: (450 + 300) - (25 x 4) = 750 - 100 = 650 units. Therefore, the minimum and maximum levels are 200 units and 650 units, respectively.

The incorrect option is 1: 215 units and 750 units.
This option provides an incorrect Minimum Level and an incorrect Maximum Level. The Maximum Level of 750 units results from incorrectly calculating the formula as simply ROL + Reorder Quantity (450 + 300), which ignores the minimum usage that occurs while waiting for the order to arrive. The actual maximum inventory is always reduced by the minimum possible consumption during the lead time. The Minimum Level of 215 units is also erroneous, as it deviates from the correct calculated safety stock of 200 units. A common error leading to a figure like 215 units is a calculation mistake in the average consumption or average lead time component of the minimum stock formula. Inventory control requires precision, and adopting these figures would result in mismanaged stock levels.

The incorrect option is 2: 180 units and 650 units.
This option correctly identifies the Maximum Level as 650 units but presents an incorrect Minimum Level of 180 units. The Minimum Level calculation is ROL (450 units) minus the Normal Usage during Normal Lead Time (250 units). A result of 180 units suggests that the deduction for normal usage was mistakenly calculated as 270 units (450 - 270 = 180). This error indicates a potential miscalculation of the average usage, perhaps by incorrectly averaging the consumption figures or the lead time in the minimum level formula. The key purpose of calculating the Minimum Level is to establish the precise safety margin needed, and a value of 180 units would inaccurately represent the desired buffer stock.

The incorrect option is 4: 350 units and 750 units.
Both the Minimum Level (350 units) and the Maximum Level (750 units) presented in this option are significantly incorrect. The Maximum Level of 750 units, as discussed, is a gross overestimation because it neglects to deduct the minimum consumption that occurs during the order period. The Minimum Level of 350 units is also drastically overstated, suggesting an unnecessarily high safety stock. A minimum stock of 350 units, given the ROL of 450 units, would imply that the normal usage during the normal lead time is only 100 units (450 - 350), which contradicts the calculated normal usage of 250 units (50 units/week x 5 weeks). These values reflect major conceptual and arithmetical errors in applying the inventory control formulas.