Assignment Model Answer Problem#2

A large bakery buys flour in 25-pound bags. The bakery uses an average of' 4,860 bags a year. Preparing an order and receiving a shipment of flour involves a cost of $10 per order. Annual carrying costs are $75 per bag. (A) Determine the economic order quantity. (B) What is the average number of bags on hand? (C) How many orders per year will there be? (D) Compute the total cost of ordering and carrying flour. (E) If ordering costs were to increase by $1 per order, how much that would affect the minimum total annual cost?

ANSWER
D = 4,860 bags/yr. S = $10 H = $75 a.
Q= 2DS = H 2(4,860)10 = 36 bags 75

b. Q/2 = 36/2 = 18 bags c.

D 4,860 bags = =135 orders Q 36 bags / orders D

d. TC = Q / 2H + Q S
= 36 4,860 (75) + (10) = 1,350 +1,350 = $2,700 2 36

e. Using S = $5, Q =
TC =

2( 4,860)(11) = 37.757 75

37.757 4,860 (75) + (11) =1,415.89 +1,415.90 = $2,831.79 2 37.757

Increase by [$2,831.79 $2,700] = $131.79

Problem#3

A large law firm uses an average of 40 boxes of copier paper a day. The firm operates 260 days a year. Storage and handling costs for the paper are $30 a year per box, and its costs approximate $ 60 to order and receive a shipment of paper. (A) What order size would minimize the sum of annual ordering and carrying costs? (B) Compute the total annual cost using your order size from part a? (C) Except for rounding, are annual ordering and carrying costs always equal at EOQ? (D) The office manager is currently using an order size of 200 boxes. The partners of the firm expect the office to be managed "in a cost-efficient manner." Would you recommend that the office manages use the optimal order size instead of 200 boxes? Justify your answer.

ANSWER
D = 40/day x 260 days/yr. = 10,400 packages
S = $60 H = $30 a. b.
=

Q0 =
TC =

2DS = H
Q D H+ S 2 Q

2(10,400)60 = 203.96 = 204 boxes 30

204 10,400 (30) + (60) = 3,060 + 3,058.82 = $6,118.82 2 204 200 10,400 (30) + (60) 2 200

c. Yes d. TC 200 =

TC200 = 3,000 + 3,120 = $6,120 6,120 6,118.82 (only $1.18 higher than with EOQ, so 200 is acceptable.)

Problem#5
The friendly Sausage factory (FSF) can produce hot dogs at a rate of 5,000 units per day. FSF supplied hot dogs to local restaurant at a steady state rate of 250 per day. The cost to prepare equipment for producing hot dog is $66. Annual holding cost is 45 cents per hot dog. The factory operates 300 days a year. Find a) The optimal run size. b) The number of runs per year. c) The length (in days) of a run.
ANSWER p = 5,000 hotdogs/day u = 250 hotdogs/day D= 250/day x 300 days/yr. = 75,000 hotdogs/yr. 300 days per year S = $66 H = $.45/hotdog per yr. a.
Q0 = 2DS H p = p u 2(75,000)66 .45 5,000 = 4,812.27 [round to 4,812] 4,750

b. D/Qo = 75,000/4,812 = 15.59, or about 16 runs/yr.

c. run length: Qo/p = 4,812/5,000 = .96 days, or approximately 1 day

Problem#6

A chemical firm produces sodium bisulphate in 100-pound bags. Demand for this product is 20 tons per day. The capacity for producing the product is 50 tons per day. Setup cost $100 and storage and handling cost are $5 per ton a year. The firm operates 200 days a year. (Note 1 ton = 2000 pounds) a) How many bags per run are optimal? b) What would the average inventory be for this lot size? c) Determine the approximate length of a production run in days? d) About how many runs per year would there be? e) How much could the company save annually if the setup cost reduced to $25 per run?

ANSWER
p = 50/ton/day u = 20 tons/day D= 20 tons/day x 200 days/yr. = 4,000 tons/yr. 200 days/yr. S = $100 H = $5/ton per yr. a.
Q0 = 2DS H p = p u 2( 4,000)100 5 50 = 516.40 tons [10,328 bags] 50 20

b.

I max =

Q 516.4 (p u ) = (30) = 309.84 tons [approx. 6,196.8 bags] P 50

Average is

I max 309.48 : = 154.92 tons [approx. 3,098 bags] 2 2

Q 516.4 = =10.33 days P 50
D 4,000 = = 7.75 [approx. 8] Q 516.4

c. Run length =

d. Runs per year: e. Q = 258.2 TC =

I max D H+ S 2 Q

TCorig. = $1,549.00 TCrev. = $ 774.50 Savings would be

$774.50