Page 180 - DMGT409Basic Financial Management

Unit 10: Inventory Management

10. Price decline, product deterioration, and product obsolescence are the risks of holding Notes
inventory.

10.7 Review Questions

1. What is EOQ?
2. What is inventory management?
3. Name the three main components of inventory.

4. The Management of Shesha Sai Textiles has predicted sales of 1,00,000 units of a product
in the next 12 months. The product cost is `18 per unit. Its estimated carrying cost is 25 per
cent of inventory value and ordering cost is `10 per order. What is the EOQ ?

5. Bharath Engineering Factory consumes 3,00,000 units of a component per year. The
ordering, receiving and handling costs are ` 60 per order and the firm is estimating its

carrying cost at 20 per cent. Component cost per unit is ` 20. Calculate EOQ.
6. Finance Department of RRR Cement Company gathered the following information. You
are required to compute EOQ, number of orders in a year, the time gap between the two
orders and the total cost of ordering and carrying. Monthly usage 150 units, ordering cost
` 20, cost of purchase of the component ` 5 and carrying cost are 16 per cent.
7. From the following information of ABC Co, Ltd., calculate minimum, maximum and re-
order stock levels.
Minimum consumption – 300 units per day
Maximum consumption – 400 units per day

Normal consumption – 320 units per day
Re-order period – 10-20 days
Re-order quantity – 1,500 units
Normal re-order period – 14 days.
8. A manufacturing company has an expected usage of 1,00,000 units of certain product
during the next year. The cost of an order is ` 40 and carrying cost is ` 0.5 per unit for one
year. Lead-time on an order is five days and company will keep a reserve supply of two

days’ usage. You are required to calculate (a) EOQ and (b) the Re-order point (assuming
250-day year).

9. A company received an order for 15,000 units at the rate of 1,000 units per order. The
production cost per unit is ` 24 per unit – ` 10 for raw materials and ` 14 as overhead
cost. It costs ` 1,500 to set up for one run of 1,000 units and inventory-carrying cost is
20 per cent of the production cost. Since the customer may buy at least 15,000 this year,

the company would like to avoid making five different production runs. Determine most
economic production run.
10. A wholesale fruit dealer sells 16,000 boxes of dry fruits during the year. The cost of placing
an order is ` 500 and each box of dry fruit costs ` 2,000. The cost of carrying inventory is 20
per cent. Find out economic order quantity.

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