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Inventory Models Exercises

1. Lila Battle has determined that the annual demand for number 6 screws is 100,000 screws. Lila, who
works in her brothers hardware store, is in charge of purchasing. She estimates that is costs $10 every
time an order is placed. This cost includes her wages, the cost of the forms used in placing the order,
and so on. Furthermore, she estimates that the cost of carrying one screw in inventory for a year is one-
half of 1 cent. Assume that the demand is constant throughout the year.

a. How many number 6 screws should Lila order at a time if she wishes to minimize total
inventory cost?

b. How many orders per year would be placed? What would the annual ordering cost be?

c. What would the average inventory be? What would the annual holding cost be?

2. It takes approximately 8 working days for an order of number 6 screws to arrive once the order has
been placed (see Exercise 1). The demand for number 6 screws is fairly constant, and on the average,
Lila has observed that her brothers hardware store sells 500 of these screws each day. Because the
demand is fairly constant, Lila thinks that she can avoid stockouts completely if she orders the number
6 screws at the correct time. What is the reorder point (ROP) ?

3. Lilas brother believes that she places too many orders for screws per year (see Exercises 1 & 2). He
believes that an order should be placed only twice per year.

a. If Lila follows her brothers policy, how much more would this cost every year over the
ordering policy that she developed earlier?
b. If only two orders were placed each year, what effect would this have on the reorder point?

4. Earlier Lila determined the optimal order quantity for number 6 screws. She had estimated that the
ordering cost was $10 per order. At this time though, she believes that this estimate was too low.
Although she does not know the exact ordering cost, she believes that it could be as high as $40 per
order. How would the optimal order quantity change if the ordering cost were $20, $30, and $40?

5. Barbara Bright is the purchasing agent for West Valve Company. West Valve sells industrial valves
and fluid control devices. One of the most popular valves is the West valve which has an annual
demand of 4,000 units. The cost of each valve is $90, and the inventory carrying cost is estimated to be
10% of the cost of each valve. Barbara has made a study of the costs involved in placing an order for
any of the valves that West Valve stocks, and she has concluded that the average ordering cost is $25
per order. Furthermore, it takes about two weeks for an order to arrive from the supplier, and during
that time the demand per week for West valves is approximately 80.

a. What is the economic order quantity?


b. What is the reorder point?
c. What is the total annual inventory cost?

6. Ken Ramsing has been in the lumber business for most of his life. Ken's biggest competitor is Pacific
Woods. Through many years of experience, Ken knows that the ordering cost for an order of plywood
is $25 and that the carrying cost is 25% of the unit cost. Both Ken and Pacific Woods receive plywood
in loads that cost $100 per load. Furthermore, Ken and Pacific Woods use the same supplier of
plywood, and Ken was able to find out that Pacific Woods orders in quantities of 400 loads at a time.
Ken also knows that 400 loads is the EOQ for Pacific Woods. What is the annual demand, in loads of
plywood, for Pacific Woods?
7. North Manufacturing has a demand for 1,000 pumps each year. The cost of a pump is $50. It costs
North Manufacturing $40 to place an order, and the carrying cost is 25% of the unit cost. If pumps are
ordered in quantities of 200, North Manufacturing can get a 3% discount on the cost of pumps. Should
North Manufacturing order 200 pumps at a time and take the 3% discount?

8. Shoe shine is a local retail shoe store on the north side of Centerville. Annual demand for a popular
sandal is 500 pairs, and John Dirk, the owner of the Shoe Shine, has been in the habit of ordering 100
pairs at a time. John estimates that the ordering cost is $10 per order. The cost of the sandal is $5 per
pair.

a. For Johns ordering policy to be correct, what would the carrying cost as a percentage of the
unit cost have to be?

b. If the carrying cost were 10% of the cost, what would the optimal ordering quantity be?

9. Ross White's machine shop uses 2,500 brackets during the course of a year, and this usage is relatively
constant throughout the year. These brackets are purchased from a supplier 100 miles away for $15
each, and the lead time is 2 days. The holding cost per bracket per year is $1.50 (or 10% of the unit
cost) and the ordering cost per order is $18.75. There are 250 working days per year.

a. What is the EOQ?

b. Given the EOQ, what is the average inventory? What is the annual inventory holding cost?

c. In minimizing cost, how many orders would be made each year? What would be the annual
ordering cost?

d. Given the EOQ, what is the total annual inventory cost (including purchase cost)?

e. What is the time between orders?

f. What is the ROP?

10. Ross White (See Exercise 9) wants to reconsider his decision of buying the brackets and is considering
making the brackets in-house. He has determined that set-up costs would be $25 in machinist time and
lost production time, and 50 brackets could be produced in a day once the machine has been set-up.
Ross estimates that the cost (including labor time and materials) of producing one bracket would be
$14.80. The holding costs would be 10% of this cost.

a. What is the daily demand rate?

b. How long will it take to produce the optimal quantity?

c. How much inventory is sold during the production run time?


d. If Ross uses the optimal production quantity, what would be the maximum inventory level?
What would be the average inventory level?

e. What is the annual holding cost?

f. How many production runs would there be each year?


g. What would be the annual set up cost?

h. Given the optimal production run size, what is the total annual inventory cost?

i. If the lead time is one-half day, what is the ROP?

11. Upon hearing that Ross White (see Questions 9 and 10) is considering producing the brackets in-
house, the vendor has notified Ross that the purchase price would drop from $15 per bracket to $14.50
per bracket if Ross will purchase the bracket in lots of 1,000. Lead times, however would increase to 3
days for this larger quantity.

a. What is the total annual inventory cost plus purchase cost if Ross buys the brackets in lots of
1,000 at $14.50 each?

b. If Ross does buy in lots of 1,000 brackets, what is the new ROP?

c. Given the options of purchasing the brackets at $15 each, producing them in-house at $14.80,
and taking advantage of the discount, what is your recommendation to Ross White?

12. After analyzing the costs of various options for obtaining brackets, Ross White (see Question 9, 10,
and 11) recognizes that although he knows that the lead time is 2 days and demand per day averages
10 units, the demand during the lead time often varies. Ross has kept very careful records and has
determined lead time demand is normally distributed with a standard deviation of 1.5 units.

a. What safety stock should Ross maintain if he wants a 98% service level?

b. What is the adjusted ROP for the brackets?

c. What is the annual holding cost for the safety stock if the annual holding cost per unit is $1.50?

13. The normal cost for a particular toy car is $5. For orders between 1000 and 1999 units the unit cost is
$4.80 and for orders of 2000 or more units, the unit cost is $4.75. Furthermore, the ordering cost is $49
per order; the annual demand is 5000 toy race cars. And the inventory carrying cost as a percentage of
unit cost is 20%. What order quantity will minimize the total inventory cost?

14. Georgia Products offers the following discount schedule for its 4- by 8-foot sheets of good-quality
plywood:

Order Unit Cost ($)


9 sheets or less 18.00
10 to 50 sheets 17.50
More than 50 sheets 17.25

Home Sweet Home Company orders plywood from Georgia Products. Home Sweet Home has an
ordering cost of $45. The carrying cost is 20%, and the annual demand is 100 sheets. What do you
recommend?

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