PLEASE DOUBLECHECK IF YOU ARE

DONE WITH THE QUIZ. YOU MAY

USE THE TIME FROM 11:00 AM TO
11:30 TO FINISH THE SAID QUIZ
 INVENTORY
MANAGEMENT
Final Term
 The first component of the
cash conversion cycle is
the average age of
inventory.
Inventory
Management The objective for managing
inventory is to turn over
inventory as quickly as
possible without losing sales
from stockouts.
Inventory Management
◦ Differing viewpoints
◦ The financial manager’s general disposition toward inventory levels is to keep them low, to
ensure that the firm’s money is not being unwisely invested in excess resources.
◦ The marketing manager would like to have large inventories of the firm’s finished products.
This would ensure that all orders could be filled quickly, eliminating the need for backorders
due to stockouts.
◦ The manufacturing manager’s major responsibility is to implement the production plan so
that it results in the desired amount of finished goods of acceptable quality available on time
at a low cost.
◦ The purchasing manager is concerned solely with the raw materials inventories. He or she
must have on hand, in the correct quantities at the desired times and at a favorable price,
whatever raw materials are required by production.
ABC Inventory System
◦ Inventory management technique that divides inventory into three groups— A, B,
and C, in descending order of importance and level of monitoring, on the basis of
the dollar investment in each.
Two-bin Method
◦ The item is stored in two bins. As an item is needed, inventory is removed from the first
bin. When that bin is empty, an order is placed to refill the first bin while inventory is
drawn from the second bin. The second bin is used until empty, and so on.
Economic Order Quantity (EOQ)
Model
◦ Inventory management technique for determining an item’s optimal order size,
which is the size that minimizes the total of its order costs and carrying costs.
◦ Order Cost
◦ The fixed clerical costs of placing and receiving an inventory order.

◦ Carrying Cost
◦ The variable costs per unit of holding an item in inventory for a specific period of time.
Economic Order Quantity (EOQ)
Model
◦ Total Cost of Inventory - The sum of order costs and carrying costs of inventory.
EOQ Model – Exercise 1
◦ MAX Company, a producer of dinnerware, has an A group inventory item that is vital
to the production process. This item costs $1,500, and MAX uses 1,100 units of the
item per year. MAX wants to determine its optimal order strategy for the item. To
calculate the EOQ, we need the following inputs:
EOQ Model – Exercise 1
◦ MAX Company, a producer of dinnerware, has an A group inventory item that is vital
to the production process. This item costs $1,500, and MAX uses 1,100 units of the
item per year. MAX wants to determine its optimal order strategy for the item. To
calculate the EOQ, we need the following inputs:
Reorder Point
◦ It reflects the number of days of lead time the firm needs to place and receive an
order and the firm’s daily usage of the inventory item. Assuming that inventory is used
at a constant rate, the formula for the reorder point is
Reorder Point – Exercise 2
◦ If a firm knows it takes 3 days to place and receive an order, and if it uses 15 units per
day of the inventory item, then the reorder point is ______ units of inventory.
Reorder Point – Exercise 2
◦ If a firm knows it takes 3 days to place and receive an order, and if it uses 15 units per
day of the inventory item, then the reorder point is ______ units of inventory.
◦ 3 days x 15 units a day
◦ 45 units of inventory.
◦ This means that when the level of inventory reaches 45 units, the firm will now place
its order of new inventories.
Safety Stock
◦ Extra inventory that is held to prevent stockouts of important items.
EOQ Model – Exercise 1
◦ MAX Company, a producer of dinnerware, has an A group inventory item that is vital
to the production process. This item costs $1,500, and MAX uses 1,100 units of the
item per year. MAX wants to determine its optimal order strategy for the item. To
calculate the EOQ, we need the following inputs:
EOQ Model – Exercise 3
◦ MAX Company, a producer of dinnerware, has an A group inventory item that is vital
to the production process. This item costs $1,500, and MAX uses 1,100 units of the
item per year. MAX wants to determine its optimal order strategy for the item.
◦ The reorder point for MAX depends on the number of days MAX operates per year.
Assuming that MAX operates 250 days per year and uses 1,100 units of this item. If the
lead time is 2 days and a safety stock of 4 units.
◦ Then the daily usage would be 1,100 units divided by 250 days equals 4.4 units daily
usage
◦ The reorder point is 2 days multiplied by 4.4 units daily plus 4 safety stock equals 12.8
units
Just-in-Time (JIT) System
◦ is used to minimize inventory investment. The philosophy is that materials should arrive
at exactly the time they are needed for production.
◦ Ideally, the firm would have only work-in-process inventory. Because its objective is to
minimize inventory investment, a JIT system uses no (or very little) safety stock.
Materials Requirement Planning
(MRP) System
◦ Inventory management technique that applies EOQ concepts and a computer to
compare production needs to available inventory balances and determine when
orders should be placed for various items on a product’s bill of materials.
Materials Requirement Planning
II (MRP II) System
◦ A sophisticated computerized system that integrates data from numerous areas such
as finance, accounting, marketing, engineering, and manufacturing and generates
production plans as well as numerous financial and management reports.
Enterprise Resource Planning
(ERP)
◦ A computerized system that electronically integrates external information about the
firm’s suppliers and customers with the firm’s departmental data so that information
on all available resources—human and material—can be instantly obtained in a
fashion that eliminates production delays and controls costs.
Exercise 4
◦ Big City Corporation expects to use 10,000 units of material XPO per month in 2019.
Last year, the total ordering costs amounted to P200,000 for a total of 40 orders. It is
expected that prices in 2019 would be 10% higher than that of last year. Determine
the expected ordering cost in 2019 if the company orders in a batch of 12,000 units
or 24,000 units.
Exercise 4
◦ Big City Corporation expects to use 10,000 units of material XPO per month in 2019. Last
year, the total ordering costs amounted to P200,000 for a total of 40 orders. It is expected
that prices in 2019 would be 10% higher than that of last year. Determine the expected
ordering cost in 2019 if the company orders in a batch of 12,000 units or 24,000 units.
◦ For 12,000 units:
◦ 10,000 units expected usage per month multiplied by 12 = 120,000 units
◦ No. of orders: 120,000 / 12,000 units per order equals 10 orders
◦ Cost per order: (P200,000 / 40 x 1.10% = 5,500)
◦ 5,500 cost per order multiplied by 10 orders = 55,000
◦ Ordering Cost: P55,000
Exercise 4
◦ Big City Corporation expects to use 10,000 units of material XPO per month in 2019.
Last year, the total ordering costs amounted to P200,000 for a total of 40 orders. It is
expected that prices in 2019 would be 10% higher than that of last year. Determine
the expected ordering cost in 2019 if the company orders in a batch of 12,000 units
or 24,000 units.
◦ For 24,000 units:
◦ No. of orders: 120,000 / 24,000 units per order equals 5 orders
◦ Cost per order: (P200,000 / 40 x 1.10% = 5,500)
◦ 5,500 x 5 = 27,500
◦ Ordering Cost: P27,500
Exercise 5
◦ In 2019, ICU Company incurred a total of P800,000 for inventory carrying costs with
an average inventory of 200,000 units. What would be the total carrying costs in 2020
if the order size is 500,000 units or 900,000 units, assuming the company does not
maintain safety stock quantity
Exercise 5
◦ In 2019, ICU Company incurred a total of P800,000 for inventory carrying costs with
an average inventory of 200,000 units. What would be the total carrying costs in 2020
if the order size is 500,000 units or 900,000 units, assuming the company does not
maintain safety stock quantity.
◦ For 500,000 units:
◦ Carrying cost per unit: (800,000 / 200,000 units 2019 average inventory = 4.00)
◦ 2020 Average Inventory: 500,000/2 = 250,000
◦ Total Carrying Cost: 4 x 250,000 = 1,000,000
Exercise 5
◦ In 2019, ICU Company incurred a total of P800,000 for inventory carrying costs with
an average inventory of 200,000 units. What would be the total carrying costs in 2020
if the order size is 500,000 units or 900,000 units, assuming the company does not
maintain safety stock quantity.
◦ For 900,000 units:
◦ Carrying cost per unit: (800,000 / 200,000 units 2019 average inventory = 4.00)
◦ 2020 Average Inventory: 900,000/2 = 450,000
◦ Total Carrying Cost: 4 x 450,000 = 1,800,000
Exercise 6
Singko Corporation buys material ABC at the optimum level of 40,000 units. Its daily
consumption of material ABC is 1,000. Materials are evenly used throughout the year.
Determine the average inventory balance for material ABC.
Exercise 6
Singko Corporation buys material ABC at the optimum level of 40,000 units. Its daily
consumption of material ABC is 1,000. Materials are evenly used throughout the year.
Determine the average inventory balance for material ABC.
◦ 40,000 optimum level of inventory / 1,000 daily consumption = 40 days
Exercise 7
Assume an annual requirement of 24,000 units, a cost per unit of P20., a cost per order
of P750 and a carrying cost percentage of 20%. Applying the formula to these data,
the EOQ is:
Exercise 7
Assume an annual requirement of 24,000 units, a cost per unit of P20., a cost per order
of P750 and a carrying cost percentage of 20%. Applying the formula to these data,
the EOQ in units is:
S = 24,000 units
O = 750
C = 20 x 20% = 4
2𝑥 24,000𝑥750
EOQ =
4
EOQ in units = 3,000 units
Exercise 7
Assume an annual requirement of 24,000 units, a cost per unit of P20., a cost per order
of P750 and a carrying cost percentage of 20%. Applying the formula to these data,
the EOQ in pesos is:
S = 24,000 x 20 = 480,000
O = 750
C = 20 x 20% = 4
2𝑥 480,000𝑥750
EOQ =
20%
EOQ = P60,000
Exercise 8
Linda Corporation has the following production data:
Annual Requirement: 40,000 units
Number of working days 320 days = 125 units
Normal Lead time 10 days
Maximum lead time 16 days
Maximum usage 150 units
Economic order quantity 5,000 units

Determine Lead time quantity, safety stock requirements, reorder point and maximum
inventory levels.
Exercise 8
Lead time quantity = Normal usage x Normal lead time
Lead time quantity = (40,000/320) x 10
Lead time quantity = 125 units [normal daily usage] x 10
Lead time quantity = 1,250 units

From order point to receipt of delivery = “normally” 1250 units

Exercise 8
Safety stock quantity = Safety stock (in usage) x Safety Stock (in time)
Safety stock (in usage) = (150 units max units – 125 normal daily usage) x 10 days
Safety stock (in usage) = 250 units

Safety stock (in time) = (16 days – 10 days) x 125 normal lead time
Safety stock (in time) = 750 units

Safety stock quantity = 250 + 750 = 1,000 units

Exercise 8
Reorder point = Lead time quantity + Safety stock quantity
Reorder point = 1,250 + 1,000
Reorder point = 2,250 units
Exercise 8
Maximum inventory levels = Safety stock quantity + EOQ
Maximum inventory levels = 1,000 + 5,000
Maximum inventory levels = 6,000 units
Exercise 9
What is the economic order quantity for the following inventory policy: A firm sells
32,000 bags of premium sugar per year. The cost per order is P200 and the firm
experiences a carrying cost of P0.80 per bag.
Exercise 9
What is the economic order quantity for the following inventory policy: A firm sells
32,000 bags of premium sugar per year. The cost per order is P200 and the firm
experiences a carrying cost of P0.80 per bag.

2𝑥 32,000𝑥200
EOQ =
0.80

EOQ = 4,000 bags

Exercise 10
Marsman Co. has determined the following for a given year:

Economic Order Quantity: 5,000 Units

Total Cost to place purchase orders for the year: P40,000
Cost to place one purchase order: P100
Cost to carry one unit for one year: P4

What is Marsman’s estimated annual usage in units?

Exercise 10
Marsman Co. has determined the following for a given year:
Economic Order Quantity: 5,000 Units
Total Cost to place purchase orders for the year: P40,000 – order cost total
Cost to place one purchase order: P100 – order cost per order
Cost to carry one unit for one year: P4

Number of Orders: 40,000/100 = 400 orders

Annual Requirement 400 x 5000 = 2,000,000 units
Exercise 11
Durable furniture company uses about 200,000 yards of a particular fabric each year.
The fabric costs P25 per yard. The current policy is to order the fabric four times a year.
Incremental ordering costs are about P200 per order, and incremental carrying costs
are about P0.75 per yard, much of which represents the opportunity cost of the funds
tied up in inventory.
How much total annual costs are associated with the current inventory policy?
Order Cost + Carrying Cost = Total annual Cost
Exercise 11
Durable furniture company uses about 200,000 yards of a particular fabric each year.
The fabric costs P25 per yard. The current policy is to order the fabric four times a year.
Incremental ordering costs are about P200 per order, and incremental carrying costs
are about P0.75 per yard, much of which represents the opportunity cost of the funds
tied up in inventory.
How much total annual costs are associated with the current inventory policy?
Exercise 11
Durable furniture company uses about 200,000 yards of a particular fabric each year.
The fabric costs P25 per yard. The current policy is to order the fabric four times a year.
Incremental ordering costs are about P200 per order, and incremental carrying costs
are about P0.75 per yard, much of which represents the opportunity cost of the funds
tied up in inventory.
How much total annual costs are associated with the current inventory policy?
Ordering Cost: 4 x 200 = 800.00
Carrying Cost: (50,000 / 2 x 0.75) 18,750.00
Total 19,550.00