Problem 1: Calculation of Raw Materials to Produce Finished Products/Goods
A factory uses a specific raw material. There are also three processes A, B, and C. The data relating to inputs, outputs, and rejections for the month of April are given below.
Inputs (in pieces) (including opening W.I.P) 
Rejections (in pieces) 
Output (in pieces) 

A  18,000  6,000  12,000 
B  19,800  1,800  18,000 
C  20,400  3,400  17,000 
Required
Calculate the cost of raw materials needed to produce one piece of the finished product when:
 The weight of the finished product is 10 gram
 The price of the raw material is $1 per kg
Solution
1. Process
No. of Pieces  Rejected Pieces  
Input  Output  No.  % of output  
A  18,000  12,000  6,000  50% 
B  19,800  18,000  1,800  10% 
C  20,400  17,000  3,400  20% 
If 1,000 pieces is the required output from Process C, the input should be 1,000 plus 20% (i.e., 1,200 pieces). This input of 1,200 units for Process C should be the output of process B.
The percentage of rejection, which is 10% in Process B, means that the input in Process B should be 1,200 pieces plus 10% (i.e., 1,320 pieces). Similarly, 1,320 pieces should be outputted by Process A.
With a percentage of rejection of 50%, the input of Process A should be 1,320 plus 50% (i.e., 1,980 pieces). This information can be tabulated as follows:
Process  Input  Rejection  % Rejection of Output  Output 
A  1,980  660  50%  1,320 
B  1,320  120  10%  1,200 
C  1,200  200  20%  1,000 
2. Given
The weight of the finished product is 10 grams per piece.
Assuming that there is no other loss of material, the total material required for 1,980 pieces of input for Process A is the following:
1,980 pcs. x 10 gms. = 19,800 gms.
Rate of Material = $1 per kg
Cost of raw material = (19,800 x 1) / 1,000 = $19.80
Cost of raw material per pc.= 19.80 / 1,000 = $0.0198
Problem 2: Calculation of Maximum, Minimum, and Reorder Stock Levels
(1) Discuss the consideration that influences the setting of maximum, minimum and reorder stock levels. Illustrate their computation by using the following information for a component ‘ZYP’.
Normal Usage  50 per week 
Minimum Usage  25 per week 
Maximum Usage  75 per week 
Reorder Quantity  300 units 
Reorder Period  4 to 6 weeks 
Solution
Note: For more information about the factors that influence stock levels, read the discussion in the previous pages.
Reorder level = Max. consumption per day / per week etc. x Max. reorder period
= 75 units x 6 weeks = 450 Units
Maximum Level = Reorder Level + Reorder Quantity – (Minimum consumption per day/per week etc. x Minimum time required to obtain supplies)
= 450 units + 300 units – (25 units x 4 weeks)
= 750 units – 100 units = 650 units
Minimum Level = ReOrder level – (Normal consumption per day/per week etc. x Average reorder period)
= 450 units – (50 units x 5 weeks)
= 450 units – 250 units = 200 units
(2) Two components, A and B, are used as follows:
 Normal usage = 50 units per week each
 Minimum usage = 25 units per week each
 Maximum usage = 75 units per week each
 Reorder quantity A: 400 units
 Reorder quantity B: 600 units
 Reorder period A: 4 to 6 weeks
 Reorder period B: 2 to 4 weeks
Required
For each component, calculating the following:
 Reorder Level
 Minimum level
 Maximum level
 Average stock level
Solution
(1) Reorder Level = Maximum consumption per day/per week etc. x Maximum ReOrder Period
Component A = 75 units X 6 weeks = 450 units
Component B = 75 units X 4 weeks = 300 units
(2) Minimum Level = Reorder Level – (Normal consumption per day/per week etc. x Average Reorder period)
Component A = 450 units – (50 units x 5 weeks) = 200 units
Component B = 300 units – (50 units x 3 weeks) = 150 units
(3) Maximum Level = Reorder level – Reorder Quantity – (Minimum consumption per day/per week, etc. x Minimum Time Required to get supplies)
Component A = 450 units + 400 units – (25 units x 4 weeks)
= 850 units – 100 units = 750 units
Component B = 300 units + 600 units – (25 units x 2 weeks)
= 900 units – 50 units = 850 units
(4) Average Stock Level = Minimum Level + 1/2 (Reorder Quantity)
Component A = 200 units + (1 / 2 x 400 units) = 400 units
Component B = 150 units + (1/2 x 600 units) = 450 units
Problem 3: Calculation of Material Turnover Ratio
The figures shown below were taken from the records of John and Co. for the year ended 31 March 2019. The valuation of inventory is $1 per kg.
Material ‘X’  Material ‘Y’  
$  $  
Opening Stock  1,700  1,200 
Purchases  51,000  32,000 
Closing Stock  1,200  1,000 
Required
Calculate the following:
 Material turnover ratio
 Number of days the average inventory is held
Solution
(1) Material consumed
Material X (kgs) 
Material Y (kgs) 

Opening stock Add: Purchases 
1,700 51,000 
1,200 32,000 
52,700  33,200  
Less: Closing Stock  1,200  1,000 
51,500  32,200 
(2) Average inventory
Average inventory = (Opening Stock + Closing Stock) / 2
Material X = (1,700 + 1,200) / 2 = 1,450 kgs.
Material Y = (1,200 + 1,000) / 2 = 1,100 kgs.
(3) Material turnover ratio
= Material consumed during the period / Average Inventory
Material X = 51,500 / 1,450 = 35.5 times (approx.)
Material Y = 32,200 / 1,100 = 29.3 times (approx.)
(4) Number of days average Inventory is held
= Total No. of days in the period / Material Turnover
Material X = 365 / 35.5 = 10.3 days (approx.)
Material Y = 365 / 29.3 = 12.5 days (approx.)
Problem 4: Calculation of Economic Order Quantity
Task A
Consider the following information:
 Annual consumption: 40,00,000 kgs
 Cost of placing one order: $100
 Cost of carrying one kg of raw material for one year: $0.50
Required
Calculate the economic order quantity (EOQ).
Solution
Task B
The annual demand for a product is 6,400 units. The unit cost is $6 and the inventory carrying cost is 25% per annum.
Required
If the cost to procure one unit is $75, determine the following:
 EOQ
 Number of orders per year
 Time between two consecutive orders
Solution
1. Calculation of EOQ
2. No. of orders per year = Annual consumption / Size of one order
= 6,400 units / 800 units
= 8 orders
3. Time gap between two consecutive orders = 12 months / No. of orders
= 12 months / 8 orders
= 1.5 months