Maximum Level or Maximum Limit of Stock:
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 |
Relevant Articles:
|
|
