Question

If the on hand inventory is 40 units, the safety stock 20 units and the target level is 120 units then an order should be placed for:

A) 100 units.
B) 60 units.
C) 20 units.
D) 40 units.
E) 80 units.

Answer 1

To determine the order quantity, we subtract the on-hand inventory from the target level and add the safety stock, leading us to the answer of ordering 100 units to reach the desired inventory level.

Step-by-step explanation:

The student's question concerns inventory management, which is a topic within the field of Business. When an inventory's target level is set to 120 units, and the company currently holds 40 units on hand with a safety stock of 20 units, an order should be placed to raise the inventory level up to the target level without dipping below the safety stock. Therefore, the order quantity should be the target level minus the current on-hand inventory plus the safety stock:

Order Quantity = Target Level - On Hand Inventory + Safety Stock = 120 units - 40 units + 20 units = 100 units.

This calculation ensures that the company maintains the proper inventory levels while accounting for the safety stock, thereby preventing potential stockouts.