ACCA FM · Chapter 4 · Question 5 of 12
Weekly usage of a raw material is between 300 and 500 units, averaging 400 units. The supplier lead time is between 2 and 4 weeks, averaging 3 weeks. At what inventory level should the company reorder in order to avoid any stockouts?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 2,000 units
Explanation
To be certain of avoiding stockouts, the reorder level must cover the maximum usage over the maximum lead time: 500 units x 4 weeks = 2,000 units. Average usage over the average lead time (1,200 units) would lead to stockouts whenever usage or lead time is above average.
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