Maximum Level or Maximum Limit of Stock:
Learning Objective:
- Definite and explain maximum limit or maximum level of stock.
- How is
maximum limit or maximum level calculated?
Definition and Explanation:
The maximum stock limit is upper level of the
inventory and the quantity that must not be exceeded without specific
authority from management. In other words, the maximum stock level is that
quantity of material above which the stock of any item should not normally
be allowed to go. This level is fixed after taking into account such factors
as: capital, rate of consumption of materials, storage space available,
insurance cost, risk of deterioration and obsolescence and economic order
quantity.
Formula:
Maximum level or maximum limit can be calculated
by the help of following formula:
Maximum limit or
level = Re-order level or ordering point –
Minimum usage ×
Minimum re-order period + Economic order quantity
Example:
| Normal usage |
100 units per day |
| Maximum usage |
130 units per day |
| Minimum usage |
70 units per day |
| Re-order period |
25 to 30 days |
| Economic
order quantity |
5,000 units |
Calculate maximum limit or level.
In
order to calculate maximum limit of stock we must calculate
re-order
point or re-order level first.
Ordering point or
re-order level = Maximum daily or weekly or monthly usage ×
Maximum re-order
= 130 × 30
= 39,000 units
Calculation:
Maximum limit or level = Re-order level or
ordering point –
Minimum quantity used in re-order period usage + Economic order quantity
= 3900 –
(70 × 25) + 5,000
= 7150 units |
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