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(Question regarding BPP FM revision kit Question #46)
From what I learned, “average inventory level” formula is as below :
Average inventory level = (Beginning Inventory + Ending Inventory) / 2
In the question, reorder quantity is 250 and buffer inventory level is 50.
In the answer they calculated average inventory level as = (250 / 2) + 50
How is that true?
Thank you always!
This is really more of a Paper MA question 🙂
The buffer (or safety inventory) is meaning that they are always holding 50 units more than they need.
If there was no buffer inventory then the inventory level would fluctuate between 250 and 0 and so the average level would be 125. However if they hold an extra 50 throughout the year as a buffer, then the average level will be 125 + 50 = 175 units.
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