Gowon CORPORATION

Practice Problem 1

Gowon Corporation has the following data available for its Material AO#4:

Annual demand 151,111 units

Working days in a year 311 days

Normal lead time 8 days

Maximum lead time 15 days

Economic order size 9,111 units

Maximum usage per day 611 units

REQUIRED:

Calculate the following:

a. Lead time quantity

Daily Usage = 151,111 units/ 311 days
= 511 units

Lead Time Quantity = Normal Usage x Normal Lead Time

= 511 x 8
Lead Time Quantity = 4,111 units

b. Safety quantity stock

Safety Stock Quantity (usage) = (Maximum usage - Normal usage) x normal lead time
= (611 -511) x 8 days
= 811 units

Safety Stock Quantity (time) = (Maximum lead time - Normal lead time) x normal usage
= (15 days - 8 days) x 511 units
= 3,511 units

Total safety stock= 3,511 + 811

Total safety stock = 4,311 units

C. Reorder point

D. Average inventory

E. Maximum inventory
c. Reorder point
Reorder point = Lead time quantity + Safety stock quantity
= 4,111 units + 4,311 units
Reorder point = 8,311 units

d. Average inventory
Average Inventory = (Economic Order Size/ 2) + Safety Stock
= (9,111 units/2) +4,311
Average Inventory = 8,811 units

e. Maximum inventory
Maximum Inventory = Maximum Usage per day x Maximum Lead Time + Safety stock
= (611 units x 15 days) + Safety Stock
Maximum Inventory= 9,111 units