Chapter 4: Inventory Management

BUSI2603U

Fall 2015

Handout 1: The Ambrosia Bakery makes cakes for freezing and subsequent sale. The bakery,
which operates five days a week, 52 weeks a year, produce cakes at the rate of 56 cakes per
day. The bakery sets up the cake-production operation and produces until a predetermined
number (Q*) have been produced. When not producing cakes, the bakery uses its personnel
and facilities for producing other bakery items. The setup cost for a production run of cakes is
$700. The cost of holding frozen cakes in storage is $10 per cake per year. The annual demand
for frozen cakes, which is constant over time, is 6500 cakes. Assume that each cake costs $15
to purchase. Determine the following:
a)
b)
c)
d)
e)
f)

Optimal production run quantity (Q*)

Total annual inventory costs
Optimal number of production runs per year
Optimal cycle time (time between run starts)
Run length in working days (t)
Average inventory

Handout 2: A local artisan uses supplies purchased from an overseas supplier. The owner
believes the assumptions of the EOQ model are met reasonably well. Minimization of inventory
costs is her objective. Relevant data, from the files of the craft firm, are annual demand of 175
units, ordering cost of $35 per order, and holding cost of $3 per unit per year
a)
b)
c)
d)

How many should she order at one time?

How many times per year will she replenish her inventory of this material?
What will be the total annual inventory costs associated with this material?
If she discovered that the carrying cost had been overstated, and was in reality only $1
per unit per year, what is the corrected value of EOQ?

Chapter 4: Inventory Management

BUSI2603U

Fall 2015

Handout 3: The annual demand for an item is 11,000 units. The cost to process an order is $75
and the annual inventory holding cost is 65 per unit. Justify your responses to the following
by showing all pertinent calculations.
a) What is the optimal order quantity?
b) What price should the firm pay per unit?
c) What is the total annual cost at the optimal behavior?
Quantity
1-9
10 999
1,000 - 4,999
5,000 or more

Price
$3.00 per unit
$2.65 per unit
$2.37 per unit
$1.95 per unit

Handout 4: County Hospital orders syringes from a hospital supply firm. The hospital expects
to use 45,000 per year. The cost to order and have the syringes delivered is $850. The annual
carrying cost is $1.50 per syringe because of security and theft. The hospital supply firm offers
the following quantity discount pricing schedule. Determine the minimum order size for the
hospital that minimizes the total cost. Justify your response by showing all pertinent
calculations.
Quantity

Price

09999

3.4

10,00019,999

3.2

20,00029,999

3.0

30,000+

2.8

Chapter 4: Inventory Management

BUSI2603U

Fall 2015

Handout 5: Nathan Manufacturing manufactures specialty car parts one of which is hubcaps.
The demand for hubcaps this year is forecasted to be 10000 units. The company produces
hubcaps at an annual production rate of 15000 hubcaps. When not producing the hubcaps, the
workers at Nathan Manufacturing produce other car parts. The workshop is open for 250 days.
The set up cost is $15 per production run and the holding cost is $0.70 per unit per year.
Assume that each hubcap costs $14 to purchase.
a)
b)
c)
d)
e)

Optimal production run quantity

Total annual inventory costs
Optimal number of production runs per year
Optimal cycle time (time between run starts)
Run length in working days

Handout 6: Groundz Coffee Shop uses 4 pounds of a specialty tea weekly; each pound costs
$12. Carrying costs are $1 per pound per week because space is very scarce. It costs the firm
$13 to prepare an order. Assume the basic EOQ model with no shortages applies. Assume 52
weeks per year, closed on Mondays.
a) How many pounds should Groundz order at a time?
b) What is total annual cost (excluding item cost) of managing this item on a costminimizing basis?
c) In pursuing lowest annual total cost, how many orders should Groundz place annually?
d) How many days will there be between orders (assume 310 operating days) if Groundz
practices EOQ behavior?

Chapter 4: Inventory Management

BUSI2603U

Fall 2015

Handout 7: Holstein Computing manufactures an inexpensive audio card (Audio Max) for
assembly into several models of its microcomputers. The annual demand for this part is 90,000
units. The annual inventory carrying cost is $6.5 per unit and the cost of preparing an order and
making production setup for the order is $800. The company operates 250 days per year. The
machine used to manufacture this part has a production rate of 2000 units per day.
a)
b)
c)
d)

Calculate the optimum lot size.

How many lots are produced in a year?
What is the average inventory for Audio Max?
What is the annual cost of preparing the orders and making the setups for Audio Max?

Handout 8: A watch repair shop buys batteries for a variety of products. The most frequent
battery purchase is the K350, with a demand of 65 per week. The order cost is $25 per order,
and the annual carrying cost is $5 per unit. Given the following price schedule, determine the
optimal order quantity and its respective cost. Show all required evidence to support your
decision.
Number of Batteries

Price

1 to 249
250 to 499
500 to 999
1000 or more

$7
$6.50
$6.00
$5.75

Chapter 4: Inventory Management

BUSI2603U

Fall 2015

Handout 9:Office express sells office supplies to businesses on a membership basis i.e. walkin customers without a membership are not allowed. The company delivers supplies to the
purchaser as long as a minimum purchase of $30,000 is made. In order to encourage bulk
orders, Office Express offers the following discount schedule on purchase quantities of boxes
of paper. Larrys Lumber has annual demand of 6,000 boxes of paper, an ordering cost of
$12.50 per order, and carrying costs are $4.55 per unit annually.
Calculate the optimal order quantity, and its associated total cost. Show all required evidence to
support your decision.
Quantity Order

Price

1 to 99 boxes
100 to 249 boxes
250 to 499 boxes
500 to 999 boxes
1000 or more boxes

$6.5 per box

$6.00 per box
$5.60 per box
$5.25 per box
$5.10 per box