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Short - Term and Mid - Term Finance Chapter - 5 Inventory Management

This document discusses inventory management concepts including: 1. Calculating the economic order quantity (EOQ) using the square root formula that considers annual usage, ordering costs and carrying costs. 2. Calculating reorder levels based on maximum usage times and ensuring sufficient stock levels. 3. Determining minimum, maximum and average inventory levels to maintain efficient operations.

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59 views1 page

Short - Term and Mid - Term Finance Chapter - 5 Inventory Management

This document discusses inventory management concepts including: 1. Calculating the economic order quantity (EOQ) using the square root formula that considers annual usage, ordering costs and carrying costs. 2. Calculating reorder levels based on maximum usage times and ensuring sufficient stock levels. 3. Determining minimum, maximum and average inventory levels to maintain efficient operations.

Uploaded by

rashed_8929685
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Short – term and Mid – term Finance chapter -5 Inventory Management

2𝐴𝑂 Where,
1. Re-Order quantity / EOQ=√
𝐶 A= Total Requirement
O= Ordering Cost/Placement Cost
C=Carrying Cost / Storage cost per unit
𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 𝐴 A= Total Requirement
2. No. of Order= 𝑂𝑟𝑑𝑒𝑟 𝑆𝑖𝑧𝑒
=𝐸𝑂𝑄
Order size= Re-Order quantity / EOQ
𝑂𝑟𝑑𝑒𝑟 𝑠𝑖𝑧𝑒 𝐸𝑂𝑄 Order size= Re-Order quantity / EOQ
3. Average Inventory= =
2 2
4. Safety Stock =Safety time x Average daily uses 𝐴
Average daily uses=360
Safety time=Days in reserve
5. Reorder level= Maximum usage x Maximum time Lead time= Required time in Order
Or =(Lead time x Average daily usage)+ Safety Stock
Maximum Stock Level=Reorder level+ reorder quantity -(Minimum usage reorder quantity= EOQ
x Minimum time)
Minimum Stock Level= reorder level+ (Normal Usage x Normal time) Normal time=average time
𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝑙𝑒𝑣𝑒𝑙+𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝑙𝑒𝑣𝑒𝑙
6. Average level= 2
𝑟𝑒−𝑜𝑟𝑑𝑒𝑟 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
Or minimum level + 2
Cash Management
7. Operating Cycle=Average age of Inventory +Average Collection Period
OC=AAI+ACP
8. Cash on Conversion Cycle= Operating Cycle-Average Payment Periods
Or, CCC=AAI+ACP-APP
𝑇𝑥𝑏 𝑇𝑥𝑏 𝐶
9. Conversion cost = 𝑐
11. Total Cost = 𝑐
+ 2
Xi
𝐶
10. Opportunity Cost=2 X i 12. Economic Lot Size =√
2𝑏𝑇
𝑖
% 𝑜𝑓 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 365
Cost of Trade Credit=100−% 𝑜𝑓 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 x𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑−𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒−𝑁𝑒𝑡 𝑆𝑎𝑙𝑒 𝑉𝑎𝑙𝑢𝑒 365
Cost of Commercial Paper= 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒 𝑉𝑎𝑙𝑢𝑒
x𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑃𝑒𝑟𝑖𝑜𝑑

2𝐴𝑂
1. EOQ/ Reorder Quantity =√ (A= Annual Usage, O=Order Cost, C= Carrying
𝑐
Cost.)
2. Reorder Level= Maximum Usage X Maximum Time =15 x 4 = 60 Usage Unit Time
Or. Minimum 5 2 day
Reorder level = Minimum stock level + (Normal Usage X Normal Normal 10 3 day
time) Maximum 15 4 day
3. Maximum Level = Reorder Level + Reorder Quantity –(Minimum
Usage X Minimum Time) = 60 +200 – (5 x 2)
= 250
4. Minimum Stock Level = Reorder level – ( Normal Usage X Normal time) = 60-(10 x 3) = 30
𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝐿𝑒𝑣𝑒𝑙+𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝐿𝑒𝑣𝑒𝑙 30+250
5. Average Level = 2
= 2
= 140

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