Material Problems with Solutions

1. Cost Sheet Problems with Solutions (5 Problems):

Cost Sheet Problem 1:
(a) A manufacturer uses 200 units of a component every month and
he buys them entirely from outside supplier. The order placing and
receiving cost is Rs.100 and annual carrying cost is Rs.12. From this
set of data calculate the Economic Order Quantity.

(b) P. Ltd. uses three types of materials A, B & C for production of X,

the final product.

The relevant monthly data for the components are as given

below:

Calculate for each component:

ADVERTISEMENTS:

(a) Re-order level

(b) Minimum level

(c) Maximum level

(d) Average stock level

Cost Sheet Problem 2:
(a) From the following data for the last 7 days, compute the Average
Stock Level for a component:

Time-lag procurement of materials: Maximum 4 days. Minimum 2

days. Re-order quantity = 1,500 units.

(b) You also ascertain the Danger Stock Level from the above
information.
Solution:
(a) Average Stock Level = Minimum Level* + ½ (Re-order quantity)

= 1.050 units + ½ × 1,500 units = 1,800 units

(b) Danger Stock Level = Average usage x Minimum Re-order Period

= 450 units × 2 = 900 units

Working Note:
(i) Re-order Level = Maximum usage x Maximum Re-order period

= 600 × 4 = 2,400 units

(ii) Minimum Level = Re-order Level – (Average usage in a week x

Average delivery period)

= 2,400 – (450 × 4 + 2/2)

= 2,400 – 1,350 = 1,050 units

Problem 2(a):
Compute the re-order level, minimum level, maximum level, average
stock level for components A and B based on the following data:

Solution:
Problem 2(b):
ZEE is a product manufactured out of three raw materials M, N and Q.
Each unit of ZEE requires 10 kg, 8 kg and 6 kg of M, N and Q,
respectively. The re-order levels of M and N are 15,000 kg and 10,000
kg, respectively, while the minimum level of Q is 2,500 kgs. The
weekly production of ZEE varies from 300 to 500 units, while the
weekly average production is 400 units.

You are required to compute:

(i) The minimum stock level of M.

(ii) The maximum stock level of N; and

(iii) The re-order level of Q.

The following additional data are given:

Solution:
(i) Minimum stock level of M:
Minimum level = Re-order level – (Normal Consumption x Normal
Delivery period)

= 15,000 kg – (400 units x 10 kg × 3 weeks) = 15,000 – 12,000 =

3,000 kg.

(ii) Maximum Stock Levels of N:

Maximum level = Re-order level + Re-order Quantity

– (Minimum Consumption x Normal Minimum period)

= 10,000 kg + 15,000 kg. – (300 x 8 x 4) kg

= 25,000 – 9,600 = 15,400 kg.

(iii) Re-order Level of Q:
Re-order level = (Maximum consumption × Maximum period)

= (500 × 5 × 6) = 15,000 kg.

Problem 2(c):
In a factory component A is used as follows:
Normal usage – 50 kg per week

Minimum usage – 25 kg per week

Maximum usage – 75 kg per week

Re-order quantity 300 kg.

Re-order period 4 to 6 weeks.

Calculate for component A:
(i) Re-order level,

(ii) Maximum level.

(iii) Minimum level; and

(iv) Average stock level.

Solution:
(i) Re-order level = Maximum usage × Maximum period

= 75 × 6 = 450 kg

(ii) Maximum level = Re-order level + Re-order quantity – (Minimum

usage × Minimum time)

= 450 + 300 – (25 × 4) = 650 kg.

(iii) Minimum level = Reorder level – (Normal usage × Average time)

= 450 – (50 × 5) = 200 kg.

(iv) Average stock level = Maximum level + Minimum level/2

= (650 + 200/2)kg = 425 kg.

Cost Sheet Problem 3:
Find the Economic Order Quantity from the following data:
Solution:
EOQ = √2AB/CS

= √2 × 18,000 × 12 × 100/1.50 × 20

√4,32,00,000/30

= √14,40,000 = 1,200 units

where, EOQ – Economic Order Quantity

A = Annual Consumption

B = Ordering Cost

C = Cost per unit

S = Inventory Carrying Cost.

Cost Sheet Problem 4:
Find out the Economic Order Quantity and Order Schedule
for raw materials and packing materials with the following
data given to you:
1. Cost of ordering: Raw Materials = Rs. 1,000 per order

Packing Materials = Rs. 5,000 per order

2. Cost of holding inventory: Raw Materials = 1 paisa per unit p.m.

Packing Materials = 5 paise per unit p.m.

3. Production rate: 2,00,000 units per month

Solution:
(i) In the case of Raw Materials:
EOQ = √2AB/CS

= √2 × 2,00,000 × 1,000 × 100/1

= 2,00,000 units

One order per month = 2,00,000 units

where, EOQ = Economic Order Quantity

A = Annual Consumption

B = Ordering or buying Cost per order

C = Cost per unit

S = Carrying Cost or Storage Cost

(ii) In the case of Packing Materials:

EOQ = √2AB/CS = √2 × 2,00,000 × 5,000 × 100/5

= 2,00,000 units

One order per month = 2,00,000 units.

Cost Sheet Problem 5:
Company uses 5,120 units of a component in a year. The purchase
price per unit of the component is Rs. 5.00 and the carrying cost
including interest is estimated at 20% of the average inventory
investment on annual basis. The cost of placing an order and
processing the delivery is Rs. 10.

(a) Ascertain the economic order quantity and the number of orders
each of the economic order quantity, to be placed for the component in
a year.

(b) Assuming that the average daily consumption of the above

component is 14 units and that the normal lead time is 15 days,
calculate the ordering level for the component, where safety stock is
considered to be equal to 25 days’ consumption. State why ordering
level is fixed.

Solution:
EOQ = √2AB/CS = √2 × 5,120 × 10 × 100/5 × 20 = 320 units

where, EOQ = Economic Order Quantity

A = Annual usage = 5,120 units

B = Cost of placing an order and processing delivery = Rs. 10

C = Cost per unit = Rs. 5

S = Carrying cost including interest = 20%

No. of orders = Annual usage/Economic Order Quantity

= 5,120 units/320 units = 16 times 

Cost per order of EOQ = 320 units × Rs. 5 + Rs. 10 + 20% of (320
units × Rs. 5 + Rs. 10)

= Rs. 1,932

(b) Ordering Level = Minimum Stock Level + Average consumption

day × Normal lead time

= (14 × 25) + (14 × 15)

= 350 + 210 = 560 units.

2. Store Ledger Problems with Solutions (2 Problems):

Store Ledger Problem 1:
Show the Store Ledger entries as they would appear when
using weighted average method of pricing issues in
connection with the following transactions:
Store Ledger Problem 2:
The following information is available for the month of
January 1998:

Prepare Store ledger showing base stock method of inventory

valuation with LIFO method of pricing material issues. The normal
base stock quantity is 500 units.
Ad