Cost

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Querist : Anonymous

Querist : Anonymous (Querist)

14 April 2012 IPL Limited uses a small casting in one of its finished products. The castings are purchased from a
foundry. IPL Limited purchases 54,000 castings per year at a cost of
800 per casting.

The castings are used evenly throughout the year in the production process on a
360-day-per-year basis. The company estimates that it costs 9,000 to place a single purchase
order and about 300 to carry one casting in inventory for a year. The high carrying costs result
from the need to keep the castings in carefully controlled temperature and humidity conditions, and
from the high cost of insurance.

Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of
delivery time and percentage of their occurrence are shown in the following tabulation:

Delivery time (days) : 6 7 8 9 10
Percentage of occurrence : 75 10 5 5 5

(ii) Assume the company is willing to assume a 15% risk of being out of stock. What would be
the safety stock? The re-order point?
(iii) Assume the company is willing to assume a 5% risk of being out of stock. What would be the
safety stock? The re-order point?
(iv) Assume 5% stock-out risk. What would be the total cost of ordering and carrying inventory for
one year?

In this problem, pls help me the logic of the calculation of Safety stock as well as ROP considering 15% & 5% risk...

Source: ICAI Practice Manual

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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15 April 2012 First solve it yourself and then let the answer be forwarded to the experts who will comment on your answers. If you are given the reply then you will not take any pain to solve the problem and it will not help you in any manner to understand the same