What is the reorder point for lumber inventory if daily usage averages 50 pieces, lead time is 8 days, and safety stock is maintained at 100 pieces?
Correct Answer
C) 500 pieces
Reorder point = (Daily usage × Lead time) + Safety stock = (50 × 8) + 100 = 400 + 100 = 500 pieces. This ensures adequate inventory during the replenishment period.
Why This Is the Correct Answer
The reorder point formula correctly combines the expected usage during lead time with safety stock to prevent stockouts. During the 8-day lead time, 400 pieces will be consumed (50 × 8), and the additional 100 pieces of safety stock provides a buffer for unexpected demand or delivery delays. This calculation ensures continuous operations without running out of inventory during the replenishment period.
Why the Other Options Are Wrong
Option A: 300 pieces
600 pieces overestimates the requirement by 100 pieces, possibly indicating an error in calculating lead time usage or double-counting safety stock.
Option B: 600 pieces
400 pieces only covers the expected usage during lead time (50 × 8) but fails to include the required 100 pieces of safety stock.
Option D: 400 pieces
300 pieces only accounts for 6 days of usage (300 ÷ 50 = 6) without including the full lead time or safety stock requirements.
Memory Technique
Use the acronym 'DLS' - Daily usage × Lead time + Safety stock. Think 'Don't Lose Stock' to remember you need all three components.
Reference Hint
Business and Finance for Contractors chapter on inventory management and materials procurement planning
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?