Practice Problems

Chapter 12Inventory Management

Problem 3:
Assume you have a product with the following parameters:
Demand 360

Holding cost per year $1.00 per unit

Order cos t: $100 per order
What is the EOQ?

Problem 4:
Given the data from Problem 3, and assuming a 300-day work year; how many orders should be
processed per year? What is the expected time between orders?

Problem 5:
What is the total cost for the inventory policy used in Problem 3?

Problem 6:
Assume that the demand was actually higher than estimated (i.e., 500 units instead of 360 units).
What will be the actual annual total cost?

Problem 7:
If demand for an item is 3 units per day, and delivery lead-time is 15 days, what should we use for
a re-order point?

Problem 8:
Assume that our firm produces type C fire extinguishers. We make 30,000 of these fire
extinguishers per year. Each extinguisher requires one handle (assume a 300 day work year for
daily usage rate purposes). Assume an annual carrying cost of $1.50 per handle; production setup
cost of $150, and a daily production rate of 300. What is the optimal production order quantity?

Problem 9:
We need 1,000 electric drills per year. The ordering cost for these is $100 per order and the
carrying cost is assumed to be 40% of the per unit cost. In orders of less than 120, drills cost $78;
for orders of 120 or more, the cost drops to $50 per unit.
Should we take advantage of the quantity discount?

ANSWERS
Problem 3:

EOQ

2*Demand *Order cost

2*360*100

72000 268 items

Holding cost
1

Problem 4:

Demand 360

1.34 orders per year

Q
268

Working days
300 /1.34 224 days between orders
Expected number of orders

Problem 5:

Demand *Order Cost (Quantity of Items)*(Holding Cost)

Q
2
360*100 268*1

134 134 $268

268
2

TC

Problem 6:

Demand *Order Cost (Quantity of Items)*(Holding Cost)

Q
2
500*100 268*1

186.57 134 $320.57

268
2

TC

Note that while demand was underestimated by nearly 50%, annual cost increases by only 20%
(320 / 268 1.20) an illustration of the degree to which the EOQ model is relatively insensitive to
small errors in estimation of demand.

Problem 7:
ROP Demand during lead - time 3 *15 45 units

Problem 8:

Q*p

2* Demand *Order Cost

(2)(30, 000)(150)

3000 units

100
Daily Usage Rate
1.50 1
Holding Cost 1

300
Daily Production Rate

Problem 9:

Q*p ($78)

(2)(1000)(100)
80 units
(0.4)(78)

Q*p ($50)

(2)(1000)(100)
100 units 120 to take advantage of quantity discount.
(0.4)(50)

Ordering 100 units at $50 per unit is not possible; the discount does not apply until 120 the order
equals 120 units. Therefore, we need to compare the total costs for the two alternatives.

Total cost Demand*Cost

Demand*Order Cost (Quantity of Items)*(Holding cost)

Q
2

Total cost($78) (1000)(78)

(1000)(100) (80)(0.4)(78)

$80, 498
80
2

Total cost($50) (1000)(50)

(1000)(100) (120)(0.4)(50)

$52, 033
120
2

Therefore, we should order 120 each time at a unit cost of $50 and a total cost of $52,033.