Question

Average stock level required to maintain the inventory is calculated as

• A. Minimum stock level + half of the reorder cost
• B. Maximum stock level + half of the reorder cost
• C. Minimum stock level + one fourth of the reorder cost
• D. Maximum stock level + one fourth of the reorder cost

Hint:

Remember the two standard expressions for Average Stock Level: 1. $\text{Minimum Level} + \frac{1}{2}(\text{Reorder Quantity})$ 2. $\frac{\text{Minimum Level} + \text{Maximum Level}}{2}$ This makes it simple to spot the correct structure on a test.

Answer 1

The Correct Option is A

Picture the stock level as a sawtooth graph, dropping steadily from a peak whenever material is used and then jumping back up each time a fresh order of size equal to the reorder quantity arrives. The lowest point it ever touches is the minimum stock level, and on top of that floor, the stock held on average across a cycle works out to half of the reorder quantity, since it climbs from zero extra to a full batch and back down in a straight line. Adding this average swing to the floor value gives Average stock level = Minimum stock level + half of the reorder quantity, which is what option 1 states.