Formulas: Maximum Level Maximum stock level = Re-order level + Re-ordering quantity

Question 4 
A factory requires 1,500 units of an item per month. The cost of each unit is Tshs27. The cost 
per order is Tshs150 and material carrying charge works out to 20% of the average material. 
Find out the economic order quantity (EOQ) and ascertain the number of orders to be placed 
per year. Would you accept a 2% price discount on a minimum supply of 1,200 units? 
Question 5
Following information is given: 
Cost of placing a purchase order Tshs20 
No. of units to be purchased during the year 5,000 Nos. 
Purchase price per unit inclusive of transport cost Tshs 50 
Annual Storage cost per unit Tshs5 
Details of lead time: 
— Average 10 days 
— Maximum 15 days 
— Minimum 6 days 
— For emergency purchase 4 days 
Rate of Consumption per day: 
— Average 15 days 
— Average 20 days 
Calculate: 
(i) Re-ordering level (ii) Re-order quantity (ii) Maximum level (iv) Minimum level (v) 
Danger level 
Question 6 
Pooja Pipes Ltd. uses about 75,000 valves per year and the usage is fairly constant at 6,250 
valves per month. The valve costs Tshs1.50 per unit when bought in large quantities; and the 
carrying cost is estimated to be 20% of average inventory investment on an annual basis. The 
cost to place an order and process the delivery is Tshs18. 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 reorder point; and (iii) the most economical order quantity if the valves cost 
Tshs4.50 each instead of Tshs1.50 each. 
Question 7 
XYZ Ltd. are the manufactures of tyre tubes for cars. The following are the details of their 
operations during the current financial year: 
Ordering cost (per order) Tshs100 
Inventory carrying cost (per annum) 20% 
Cost of tubes (per tube) Tshs500 
Normal usage (tubes per week) 150 
Minimum usage (tubes per week) 50 
Maximum usage (tubes per week) 200 
Lead time to supply (weeks) 6-8 

---

You are required to calculate: 
(i) Economic order quantity. If the supplier is willing to supply quarterly 1,500 units at a 
discount of 5 
per cent, is it worth accepting? 
(ii) Re-order level 
(iii) Maximum level of stock 
(iv) Minimum level of stock