IEOR 3402: Assignment 5 Solutions

1. Nahmias 5.12
C
o
= 28.50 20.00 + (.4)(28.50) = 19.90
C
u
= 150 28.50 = 121.50
Critical Ratio =
C
u
C
u
+C
o
= .86
(a) Demand is assumed to be uniform from 50 to 250. We wish to nd Q such that the area
under the pdf curve (a horizontal line at height 0.005 from 50 to 250) from 0 to Q is
equal to 0.86.
Q50
200
= 0.86 Q = 222
E(purchase cost) = unit cost * Q = 28.5 * 222 = $6327.
E(revenue from store) = 150[E(sale|demand < 222)P(demand < 222)+E(sale|demand >
222)P(demand > 222)]
= 150 [(50 + 222)/2 (222 50)/200 + 222 (250 222)/200]
= 22206
E(revenue from discount rm) = 20 [E(excess|demand < 222)P(demand < 222)]
= 20 [(222 (222 50)/2) (222 50)/200]
= 1479.2
E(holding cost) = unit dollar holding cost E(amount tied up in inventory)
= 0.40 28.5 (222 (50 + 222)/2) (222 50)/200
= 843.144
(b) In this case the demand distribution is assumed to be normal with mean 150 and standard
deviation 20. We wish to nd Q to solve: F(Q) = .86. From Table A-4 we have that
1
z = 1.08, giving:
Q = +z = 150 + (20)(1.08) = 172.
(c) The uniform distribution case has a higher variance.
Variance of a uniform variate =
(b a)
2
12
=
(250 50)
2
12
= 3333
Variance in part b) = (20)
2
= 400
Hence it is reasonable that our optimal order quantity in part a) is higher so as to
prepare for large deviation of the demand from the mean.
2. (page 245) No. Counterexample:
F(Q) = 1 e
10Q
G(Q) = c
o

Q
0
(Qx)f(x)dx +c
u

Q
(x Q)f(x)dx
G(Q) =
c
o
(10Q1 +e
10Q
) +c
u
e
10Q
10
Letting: c
o
= 1 and c
u
= 24
We get a non-integer Q

:
F(Q

) = 1 e
10Q

=
1
25
Q

= 0.321
and
G(0) = 2.4 > G(1) = 0.90. According to the textbook, we should set Q

= 0, but in this
case, it is better to round up.
3. (Discrete Demand)
Suppose x
n
< Q < x
n+1
. G(Q) = c
o

n
i=1
(Qx
i
)p
i
+c
u

i=n+1
(x
i
Q)p
i
.
For small > 0 (not aecting our assumption on the value of Q above):
G(Q+) = c
o

n
i=1
(Q+ x
i
)p
i
+c
u

i=n+1
(x
i
Q)p
i
G(Q+) G(Q) = (c
o
F(Q) c
u
(1 F(Q)))
G(Q+) G(Q) = ((c
o
+c
u
)F(Q) c
u
)
Hence the function G(Q) is increasing as long as (c
o
+ c
u
)F(Q) c
u
0. Therefore the
2
optimal Q

is given by smallest value of Q for which F(Q)

cu
co+cu
, i.e. Q

is the min point

of G(Q).
4. (a) Number of guests N = Normal(170, 400).
Let p = price of food per guest.
c
o
= p, c
u
= 10p. If we estimate there will be Q guests, then food for Q+ 10 guests will
be available. Hence objective function:
G(Q) = c
o
E[(QN)
+
] +c
u
E[(N Q10)
+
]
(b) The minimizer of G(Q) is given by: c
o
F(Q) +c
u
F(Q+10) = c
u
. Solving it using excel,
Q

= 188. Use Leibnizs rule to do dierentiation on G(Q) w.r.t. Q. See textbook page
259.
5. (a) Refer to textbook page 268, section The Holding Cost.
(b) In the EOQ model with planned backorders, we exactly knew how much the backorders
would be in every cycle. However, in this model we know it only in an expected sense.
The amount of backorder might vary from cycle to cycle but on average it will be n(R).
6. Given: (t) =
1

2
e
t
2
2
Then:

z
t(t)dt =

z
t
1

2
e
t
2
2
dt =
1

2
e
t
2
2
|

z
=
1

2
e
z
2
2
= (z)
7. (Nahmias 5.13)
h = (1.50)(.28) = .42, K = 100, p = 12.80
= (280)(12) = 3360, = (280)(5) = 1400, = 77

5 = 172.18
(a) EOQ = Q
0
=

2K
h
=

(2)(100)(3360)
0.42
= 1265
1 F(R
1
) =
Qh
p
=
(1265)(0.42)
(12.80)(3360)
= .0124
z
1
= 2.24, L(z
1
) = .0044, n(R
1
) = .75
Q
1
=

2(K +pn(R))
h
= 1324
1 F(R
2
) = 0.0129
z
2
= 2.23, L(z
2
) = .004486, n(R
2
) = .77
Q
2
=

(2)(3360)(100 + 12.8(0.77))
0.42
= 1326, this is close enough to stop.
3
z = 2.23, R = +z = 1400 + (172.18)(2.23) = 1784
Giving us optimal (Q, R) = (1326, 1784).
(b) G(Q, R) =
K
Q
+h[
Q
2
+R ] +
pn(R)
Q
K
Q
= $253.39
h[
Q
2
+R ] = $439.74
pn(R)
Q
= $24.97
(c) = 0 EOQ solution, cost =

2Kh = $531.26
G(Q, R) = $718.10 cost of uncertainty = 718.10 531.26 = $186.84 annually
8. (Nahmias 5.39)
Mean weekly demand = 10 =520/year. Variable weekly demand = 26 (
wk
=

26 = 5.1)
Three months = 1/4 year = 13 weeks (12 weeks would also be acceptable)
= (10)(13) = 130
= 5.1

13 = 18.4
I = .20 +.03 +.02 = .25
h = Ic = (.25)(20) = 5
K = 28
p = 55 + 25 = 80
(a) EOQ =

(2)(28)(520)
5
= 76
1 F(R) =
Qh
p
= 0.0091
z = 2.36
R = z + = 173
(b) n(R) = L(z) = (18.4)(0.0031) = 0.057
Q
1
=

(2)(520)
5
(28 + (80)(0.57)) = 82
1 F(R
1
) =
(82)(5)
(80)(520)
= 0.0099
z = 2.33, n(R) = L(z) = 0.0626
4
Q
2
=

(2)(520)
5
(28 + (80)(0.0626)) = 83
Stop. (Q, R) = (83, 173)
(c) G(Q, R) =
K
Q
+h[
Q
2
+R ] +
p
Q
n(R)
for a) G(Q, R) = $629.8
for b) G(Q, R) = $628.34
Note: n(R) = L(z), where z =
173130
18.4
= 2.337
n(R) = (18.4)(0.0033) = 0.0607
(d) Incorporating lost sales: In this case R is determined from:
1 F(R) =
Qh
Qh +p
= 0.0091
Same value (Q,R) values are the same. Thus there is no eect from explicitly including
lost sales.
9. (Nahmias 5.40)
= 0.96
Q = EOQ = 76
F(R) = = 0.96
z = 1.75
R = z + = (18.4)(1.75) + 130 = 162
10. (a) Since = 360 per year, mean demand per month will be 30. Thus, the numerical value
of safety stock = 40 - 30 = 10.
(b) It should satisfy the following two conditions:
i. rst month demand 40
ii. entire demand for the next two months 40 +
Q
2
(c) Compare the increase of unit price and holding cost to the average gain of fewer lost
sales. If the average gain is higher than the increase of the cost, we can accept this
option.
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