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UpdatesandErrata 1.Anautomobilemanufacturerusesabout60,000pairsofbumpers(frontbumperandrearbumper)peryear,whichitordersfroma
supplier.Thebumpersareusedatareasonablysteadyrateduringthe240workingdaysperyear.Itcosts$3.00tokeeponepairof
Chapter13 bumpersininventoryforonemonth,anditcosts$25.00toplaceanorder.Apairofbumperscosts$150.00.
News,Articles&Links
NewsFeeds a.Whichinventorymodelshouldbeusedhere:theinstantaneousmodel,thenoninstantaneousmodel,orthesingleperiodmodel?
PowerWebArticles Howdoyouknow?
WeeklyUpdateArchive b.Writetheannualcarryingcostfunction.
Quizzes c.Writetheannualorderingcostfunction.
MultipleChoiceQuiz
TrueorFalse
d.Writetheannualtotalcostfunction.
SelfQuizfromCD e.WhatistheEOQ?
InteractiveExercises f.WhatisthesignificanceoftheEOQ?
InteractiveOM g.WhatisthetotalannualexpenseoforderingtheEOQeverytime?
MoreResources h.Howmanyorderswillbeplacedperyear?
Problems/Solutions i.Whatisthetotalannualexpenseofordering600pairsofbumperseverytime?HowmuchissavedperyearbyorderingtheEOQ?
Glossary
2.TheAcmeBumperCo.manufacturesbumpersforautomobilesforoneofthebigthreeautocompanies.About60,000pairsofbumpers
(frontbumperandrearbumper)areorderedbytheautocompanyperyear,atapriceof$150.00perpair.Pairsofbumpersareproduced
atarateofabout400perworkingday,andthecompanyoperates240daysperyear.Thecompanymanufacturesotherproducts,andit
mustsetupthemanufacturingsystemforaproductionorderforpairsofbumpers,whichcosts$250.00.Itcosts$2.50tostoreonepair
ofbumpersforonemonth.

a.Whichinventorymodelisappropriatehere:theinstantaneousmodel,thenoninstantaneousmodel,orthesingleperiodmodel?How
doyouknow?
b.Writetheannualcarryingcostfunction.
c.Writetheannualsetupcostfunction.
d.Writetheannualtotalcostfunction.
e.WhatistheEOQ?
f.WhatisthesignificanceoftheEOQ?
g.WhatisthetotalannualexpenseofproducingtheEOQeverytime?
h.Howmanyproductionrunswillberequiredperyear?
i.Whatisthetotalannualexpenseofmanufacturing3,000pairsofbumpersperproductionrun?Howmuchissavedperyearby
producingtheEOQeverytime?

3.UsethedatafromProblem1tosolvethisproblem,inadditiontothedatabelow.Thesupplieroffersasystemofquantitydiscounts,as
follows:

OrderQuantityCostperPairDiscount
1to299pairs$150.000%
300to499pairs$150.004%
500ormorepairs$150.0010%

a.Whichinventorymodelisappropriatehere:theinstantaneousmodel,thequantitydiscountmodel,orthesingleperiodmodel?How
doyouknow9
b.Writetheannualtotalcostfunctionforordersforlessthan300pairs.
c.Writetheannualtotalcostfunctionforordersfor300to499pairs.
d.Writethetotalcostfunctionforordersforatleast500pairs.
e.Drawthegraphofthethreetotalcostfunctionsonapieceofrectangularcoordinatepaper.
f.WhatistheEOQ?
g.Whatisthetotalannualexpense,includingthepurchasingcostoforderingtheEOQeverytime?

4.Thepurchasingagenthasascertainedthattheusageoffloppydisksinthecompanyisapproximatelynormallydistributed,withamean
of30perworkingdayandavarianceof16.Thecompanyoperates240daysperyear.Floppydisksareobtainedfromasupplierwhoisvery
reliable,whenanorderisplaced(onday0),itisalwaysreceivedonthefifthworkingday.Thecompanycannotaffordtorunoutoffloppy
disks,andthepurchasingagenthasestablisheda99.5percentservicelevel.

a.Whichreorderpointmodelisappropriatehere,fixedleadtimeandvariabledemand,variableleadtimeandfixeddemand,orvariable
demandandvariableleadtime?
b.Whatisthemeanusageduringleadtime?
c.Whatisthestandarddeviationoftheusageduringleadtime?
d.Whatisthereorderpoint?DrawadiagramliketheoneinFigure1311inyourtextbook.
e.Whatisthesignificanceofthereorderpoint?
f.Whatisthesafetystock?

5.Thepurchasingagenthasascertainedthattheemployeesuseabout50pencilsperday,withverylittlevariation.Pencilsareordered
fromasupplierwhoseshipmentsareirregular.Theyarenormallydistributedwithameanof10workingdaysandavarianceof4.Hehas
establisheda95percentservicelevelforpencils.

a.Whichreorderpointmodelisappropriatehere:variabledemandandfixedleadtirne,fixeddemandandvariableleadtime,orvariable
demandandvariableleadtime?
b.Whatisthemeanusageduringleadtime?
c.Whatisthestandarddeviationofusageduringleadtime?
d.Whatisthereorderpoint?DrawadiagraminthestyleofFigure1313inyourtextbook.
e.Whatisthesignificanceofthereorderpoint?
f.Whatisthesafetystock?

6.Thepurchasingagenthasascertainedthattheusageofletterheadpaperhasanapproximatelynormaldistributionwithameanof200
sheetsperworkingdayandastandarddeviationof13sheets.Letterheadpaperisorderedfromaprinterwhosedeliveriesarevariable,
withameanof25workingdaysandavarianceof4workingdays.Thepurchasingagenthasestablisheda99percentservicelevelfor
letterheadpaper.

a.Whichreorderpointmodelisappropriatehere:variabledemandandfixedleadtime,fixeddemandandvariableleadtime,orvariable
demandandvariableleadtime?
b.Whatisthemeanusageduringleadtime?
c.Whatisthestandarddeviationofusageduringleadtime?
d.Whatisthereorderpoint?DrawadiagraminthestyleofFigure1313inyourtextbook.
e.Whatisthesignificanceofthereorderpoint?
f.Whatisthesafetystock?

7.(Onestepbeyondbasedonstatistics.)TheWhirlwindApplianceStoresellsfreezersforhomeuse.Thesearelarge,uprightunitswhich
resemblearefrigerator.Theydifferinoperationinthattheentireinterioriskeptatafreezingtemperature.Thestoreordersthefreezers
fromthefactory,whichisveryreliableandwilldelivertheorderwithinoneweek(7calendardays)almostinvariably.Herearethevolumes
ofsalesforthepast50weeks:2,1,4,5,2,0,3,6,7,3,4,2,2,4,3,5,5,1,3,6,4,5,1,0,1,4,3,5,7,6,3,5,4,1,5,5,4,5,6,4,
3,2,5,4,1,5,2,5,4.Futuresalesareexpectedtobesimilar.Thestoremanagerwishestoestablisha95percentservicelevel.

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a.Whatisthefrequencydistributionforthisdata?Doesitappeartobeapproximatelynormal?
b.Whatarethemeansalesoffreezersperweek?
c.Whatistheempiricalprobabilitydistribution?
d.Whatisthecumulativeprobabilitydistribution?
e.Whatisthereorderpoint?(Hint:usethecumulativeprobabilitydistribution.)
f.Whatisthesafetystock?

8.Anappliancestoreknowsthatthedistributionofmonthlysalesof50"TVsetsisapproximatelynormalwithameanof6setsanda
standarddeviationof1.5sets.Thesetscost$2,750each,andarepricedat$4,000.Thesetsareorderedfromthemanufactureronthe
10thofthemonth(ortheprecedingbusinessday),andthereisaleadtimeofsevenbusinessdays.Thereare20businessdaysinatypical
month.Themanagerwishestomaintaina90percentservicelevel.ThestoreisopensixdaysaweekandSundayafternoons.OnMarch
31,thestorehadfive50"TVsetsonhand.Hereisdataregardingsalesforthenextthreemonths:

MonthSales
April4sets
May8sets
June7sets

a.Whichinventorymodelisappropriatehere:thefixedquantityandvariableorderintervalmodel,thevariablequantityandfixed
orderintervalmodel,orthesingleperiodmodel?
b.HowmanysetsshouldbeorderedonApril10?
c.WhatwillbetheendinginventoryonApril30?
d.HowmanysetsshouldbeorderedonMay10?
e.WhatwillbetheendinginventoryonMay31?
f.HowmanysetsshouldbeorderedonJune10?

9.UseTable133inyourtextbooktoanswerthesequestions.

a.WhatistheexpectednumberofunitsshortpercycleinProblem4?
b.WhatistheimplicationoftheexpectednumberofunitsshortinProblem4?
c.WhatistheexpectednumberofunitsshortinProblem5?
d.WhatisthesignificanceoftheexpectednumberofunitsshortinProblem5?

10.Hereisalistof15items,containingtheannualvolumeofsalesandtheunitprice,AnABCinventorysystemistobeestablishedon
thebasisoftheannualdollarvalueofeachitem.ClassificationAwillcontainabout60%ofthedollarvalueBwillcontainabout30%and
Cwillcontainabout10%.Determinetheitemswhichbelongineachcategory.

Item Annual Unit Annual

Volume Price DollarValue

a 800 26

b 300 20

c 9,000 7

d 7,000 5

e 200 65

f 100 83

g 1,000 42

h 1,800 6

i 450 18

j 7,500 10

k 350 9

l 700 28

m 500 95

n 750 30

o 900 72

a.Determinetheannualdollarvalueforeachitemandthetotalannualdollarvalue.
b.WhichitemsshouldbeassignedtotheAcategory?TotheBcategory?TotheCcategory?

11.Adelicatessensellspotatosaladfromtraysinthecoolercabinetthesalespersonpacksthesaladintocardboardcontainersaccording
tothecustomers'orders.Thesupervisorpreparesonebatchofsaladinthemorninganddisposesofanyleftoversaladatclosingtime.
Potatosaladsellsfor$1.49perpound,andcosts$0.80toprepare.Salesofpotatosaladarebelievedtobenormallydistributedwitha
meanof60poundsperdayandavarianceof256.

a.Whichinventorymodelisappropriatehere:thesingleperiodmodel,theinstantaneousmodel,orthequantitydiscountmodel?How
doyouknow?

b.Whatistheshortagecost, Image95?

c.Whatistheexcesscost, Image96?
d.Howlargeabatchshouldthesupervisormixupinthemorning?

12.(Onestepbeyond)KereyWhiteoperatesaboothwhichsellsspecialtymerchandiseattheStateFair.Thisyearsheisplanningtosellt
shirtswhichareinscribed:

FAMILYFUN
THESTATEFAIR
FORALLAGES

Thepriceofthetshirtswillbe$25.00.each.Ms.Whitebuysplainwhitetshirtsfromafactoryatacostof$864pergross(144shirts),
witha3%discountforpaymentwithin10days,whichshealwaystakes.Ms.Whiteinscribesthedesignonthetshirts,herself,and
estimatesthatherlaborisworth$4.00pershirt.UnsoldTshirtsareuseless,butcanbesoldtoascrapdealerfor$0.16perpoundthere
areeighttshirtsinapound.ThenumberoftshirtswhichwillbesoldattheStateFairis,ofcourse,unknown.But,basedonprevious
experience,Ms.Whiteestimatesthatthemeansalesare3gross,andthattheprobabilityofsellingmorethan3grossdecreasesasthe
quantityincreases.

a.Whichinventorymodelshouldbeusedheretheinstantaneousmodel,thequantitydiscountmodel,orthesingleperiodmodel?
b.Whichprobabilitydistributionshouldbeusedhere?
c.Whatistheshortagecost,Cs?
d.Whatistheexcesscost,Ce?
e.Whatistheservicelevel?
f.HowmanytshirtsshouldMs.Whiteprepare(ingross)?
g.EstimateMs.White'sprofitsforyouranswerinf.

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13.TheownerofSmith'sSpeedyServiceStationcalculatesthathesellsabout15,000gallonsofregularunleadedgasperyear.Hesells
gasfromselfservicepumpsandwishestomaintainaservicelevelof99%peryear.Althoughthepriceofgasolinefluctuateswiththe
seasons,heestimatesthatitaveragesabout$1.00pergallon.Itcosts$.25tostoreonegallonforoneyear.Itcosts$25.00toplaceand
receiveoneorder.Theleadtimeforanorderis1dayandthestandarddeviationofsalesisabout5gallonsperday.

a.Whataveragenumberofgallonsshortwillbeconsistentwiththespecifiedservicelevel?
b.WhatistheEOQ?
c.Whatistheaveragenumberofgallonsshortperordercycle?
d.Whatleadtimeservicelevelisnecessaryforthe99%servicelevel?

Solutions

1.a.Usetheinstantaneousmodel.
b.Theannualcarryingcost=HQ/2=3(12)Q/2=18Q.
c.Theannualorderingcost=DS/Q=60000(25)/Q=1500000/Q.
d.Theannualtotalcost=18Q+1500000/Q.

e. Image97 Image98289pairsofbumpers.
f.Everytimethecompanyplacesanorder,itshouldorder289pairsofbumpers.
g.Theannualtotalexpense=(Q/2)H+(D/Q)S=(289/2)36+(60,000/289)25=$10,392.00peryear.
h.Thenumberoforders=D/Q=60000/289208peryear.
i.Theannualtotalexpense=18(600)+1500000/600=$13,300.Theannualsavingsare$13,300$10,392=$2,908.00.

2.a.Usethenoninstantaneousmodel.
b.Theannualcarryingcost=(HQ/2)[(PU)/P]=(2.50(12)Q/2)[(40060000/240)]/400=5.625Q.
c.Theannualsetupcost=DS/Q=60000(250)/Q=15000000/Q.
d.Theannualtotalcost=5.625Q+15000000/Q.

e.EOQ= Image99 Image100= Image101x= Image1021,633pairsofbumpers.

f.Thecompanyshouldplaceaproductionorderfor1,633pairsofbumperseverytime.
g.Theannualtotalcost=5.625EOQ+15000000/EOQ=5.625(1633)+15000000/1633$18,371.00peryear.
h.Thenumberofproductionruns=D/EOQ=60000/1633=36.74runsperyear.
i.Theannualtotalcost=5.625(3000)+15000000/3000=$21,875.00.Theannualsavingsare$21,875.00$18,371.00=
$3,504.00.

3.a.Usethequantitydiscountmodel.
b.Theannualtotalcost=18Q+1500000/Q+150D.
c.Thenetprice=150(1d)=150(1.04)=$144.00.Theannualtotalcost=18Q+1500000/Q+144D.
d.Thenetprice=150(1d)=150(1.10)=$135.00.Theannualtotalcost=18Q+1500000/Q+135D.
e.
f.TheEOQistheminimumfeasiblepoint,whichis500pairsofbumpers.
g.Theannualtotalcost=18(500)+1500000/500+135(500)=$79,500.00

4.a.Usethefixedleadtimeandvariabledemandmodel.
b.Themeanusageduringleadtime= Image103(LT)=30(5)=150floppydisks.

c.Thestandarddeviation= Image104floppydisks.

d.ROP= Image103(LT)+z(standarddeviations)=150+2.58(8.94)=173.08floppydisks

e.Whenthequantityoffloppydisksonhandfallsto173.08disks(orfewer)placeanorderfortheeconomicorderquantity.
f.Thesafetystock=ROPmeanusage=173.08150=23.08floppydisks.

5.a.Usethefixeddemandandvariableleadtimemodel.
b.Themeanusageduringleadtime=d Image105=50(10)=500pencils.

c.Thestandarddeviation= Image106pencils.

d.ROP= Image103(LT)+z(standarddeviations)=500+1.65(100)=665pencils.
e.Whenthequantityofpencilsonhandfallsto665(orfewer),placeanorderfortheeconomicorderquantity
f.Thesafetystock=ROPthemeanusage=665500=165pencils.

6.a.Usethevariabledemandandvariableleadtimemodel.

b.Themeanusageduringleadtime= Image103(LT)=200(25)=5,000sheets.

c.Thestandarddeviation= Image107= Image108= Image109=

405.25Sheets.
d.ROP=Themeanusage+z(standarddeviations)=5000+2.33(405.25)=5,944.23sheets.
e.Whenthequantityofletterheadpaperonhandfallsto5,944.23sheets(orfewer)placeanorderfortheEconomicOrderQuantity.
f.Thesafetystock=ROPthemeanusage=5,944.235,000=944.23sheets.

7.a,b,c

Freezer x p Cumulative

Sales(x) p

0 2 0 .04 .04

1 6 6 .12 .16

2 6 12 .12 .28

3 8 24 .16 .44

4 10 40 .20 .64

5 12 60 .24 .88

6 4 24 .08 .96

7 2 14 .04 1.00

50 180 1.00

Thefrequencydistributionishighlyskewnegativeandisnotapproximatelynormal.

d. Image110freezersperweek.

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e.Thefirstcumulativeprobabilitywhichexceeds.95is.96,andthereorderpointis6freezers.
f.Thesafetystock=63.6=2.4freezers.

8.a.Usethefixedorderintervalandvariable Image111quantitymodel.

b.Theexpecteddemand= Image103(OI+LT)=6sets.
Thesafetystock=sets.
Theorderquantity=theexpecteddemand+thesafetystockthequantityonhand=6+1.9253sets.
c.TheendinginventoryonApril30willbe5+34=4sets.
d.Theorderquantity=theexpecteddemand+thesafetystockthequantityonhand=6+1.9244sets.
e.TheendinginventoryonMay31willbe4+48=0sets.
f.Theorderquantity=theexpecteddemand+thesafetystockthequantityonhand=6+1.9208sets.

9.a.E(z)=E(2.58)=.002
E(n)=E(z)(standarddeviations)=.002(8.94)=.02floppydisks.
b.Themeannumberwhichwillbeshortperordercycleis.02floppydisks.Inotherwords,noshortageshouldbeexperiencedinmost
order
cycles,butveryrarelytheremaybeashortageofonedisk.
c.E(z)=E(1.65).020.
E(n)=E(z)(standarddeviations)=.020(100)=2pencils.
d.Themeannumberwhichwillbeshortperordercycleis2pencils.Inotherwords,sometimestherewillbeashortageofaround2pencils
(e.g.,1,2,3,or4,butprobablynotmore,pencils).

10.a.

Item Annual

DollarValue

a $20,800*

b 6,000

. .

. .

n 22,500

o 64,800
Total
$372,050

*(800x$26.00)
b.Rearrangetheitemsintheorderofdecreasingannualdollarvalue.Calculatethecumulativetotalsandthecumulativepercents.Here
arethefirstfewitems:

Item Annual Cumulative Cumulative

DollarValue Percent
DollarValue

o $64,800 $64,800 17.41%

c 63,000 127,800 34.35*

m 47,500 175,300 47.11

g 42,000 217,300 58.41

d 35,000 252,300 67.81

*34.35%=100(127,800)/372,050.ClassificationAwillcontainitemso,c,m,andg.Bwillcontainitemsd,n,a,l,e,andh.Cwillcontain
itemsf,i,j,b,andk.

11.a.Usethesingleperiodmodel.
b.Cs=Revenueperunitcostperunit=$1.49$0.80=$0.69perpound.
c.Ce=Costperunit=salvagevalueperunit=$0.800=$0.80.
d.Theservicelevel=Cs/(Cs+Ce)=.69/(.69+.80)=.46.
e.Thevalueofzfortheservicelevel=0.04.Thebatchsize=themeandemand+z(standarddeviations)=600.04(16)=59.36
poundsofpotatosalad.

12.a.Thesingleperiodmodel,sincethetshirtsaresalableonlyatoneevent.
b.ThePoissondistributiondisplaysdecreasingprobabilitiesasthevalueoftherandomvariableincreases.

c. Image112=revenueperunitcostperunit=25(144)864(.97)=3600838.08=$2761.92.

d. Image113=costperunitsalvagevalueperunit=864(.97).02(144)=838.082.88=$835.20.

e.Theservicelevel= Image114.
f.UsethecumulativePoissondistributionwithm=3,inTableCtoobtainthesevalues:

x P(x)

0 .050

1 .199

2 .423

3 .647

4 .815

5 .916

6 .966

7 .988

8 .996

9 .999

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4/24/2017 Problems/Solutions
10 1.000

BecauseP(x)=.815isthelowestprobabilitytoexceed.7678,Ms.Whiteshouldprepare4grossoftshirts.
g.Profits=revenuesexpenses=4(3600)4(838.08)=4(2761.92)=$11,047.68.ItisimpropertocountMs.White'slaboras
anexpense.

13.a. Image115gal.

b. Image116gal.
c. Image117gal.percycle.
d.FindE(z).

Image118(Table134inyourtextbook)

Image119
RefertoTable133inyourtextbook.ForE(z)=.35,z Image120.08andtheservicelevel Image120.53.

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