BU672 QUANTITATIVE TECHNIQUES FOR BUSINESS
TUTORIAL QUESTIONS & SOLUTIONS
TOPIC 4 – INVENTORY CONTROL
Question 1:
A business owner has compiled the following table of six items in inventory for his newly
established hardware shop, along with the unit cost and the annual demand in units:
Identification Code Unit Cost ($) Annual Demand Annual Dollar
(Units) Volume
XX1 $5.84 1,200 $7,008.00
B66 $5.40 1,110 $5,994.00
3CPO $1.12 896 $1,003.52
33CP $74.54 1,104 $82,292.16
R2D2 $2.00 1,110 $2,220.00
RMS $2.08 961 $1,998.88
I. Using ABC analysis to determine which item(s) should be carefully controlled using a
quantitative inventory method and which item(s) should not be closely controlled.
Ans: The item that needs strict control is 33CP, so it is an A item.
II. What is the annual dollar volume for all 6 items?
See table above – last column.
Question 2:
AB Electronics, a small manufacturer of electronic equipment, has approximately 7,000 items in
its inventory and wants to implement system to manage its inventory. The manufacturer has
determined that 10% of the items in inventory are A items, 35% are B items, and 55% are C
items. The manufacturer would like to set up a system in which all A items are counted monthly
(every 20 working days), all B items are counted quarterly (every 60 working days), and all C
items are counted semiannually (every 120 working days). How many items need to be counted
each day?
Ans: 108 items
Question 3:
John is the purchasing manager for an insurance company chain with a central inventory
operation. John’s fastest-moving inventory items has a demand of 6,000 units per year. The
cost of each unit is $100, and the inventory carrying cost is $10 per unit per year. The average
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ordering cost is $30 per order. It takes about 5 days for an order to arrive, and demand for 1
week is 120 units (this is a corporate operation, and there are 250 working days per year).
I. What is the EOQ? Ans:189.74 units (190 units)
II. What is the average inventory if the EOQ is used? Ans: 94.87
III. What is the optimal number of orders per year? Ans: 31.62
IV. Find the optimal number of days in between any two orders. Ans: 7.91
V. What is annual cost of ordering and holding inventory? Ans: $1,897.30
VI. What is the total annual inventory cost, including the cost of 6,000 units? Ans: $601,897
Question 4:
A computer shop purchases 8,000 transistors each year as components in minicomputers. The
unit cost of each transistor is $10, and the cost of carrying one transistor in inventory for a year
is $3. Ordering cost is $30 per order.
I. What is the optimal order quantity? Ans: 400 units.
II. Calculate the expected number of orders placed each year. Ans: 20 orders.
III. What is the expected time between orders? Assume that the shop operates on a 200-
day working year? Ans: 10 working days (with 20 orders placed each year, an order of
400 units is placed every 10 working days).
Question 5:
Annual demand for a particular product is 10,000 units in a local stationery shop. The shop
operates 300 days per year and finds that deliveries from his supplier generally takes 5 working
days. Calculate the reorder point for the shop. Ans: 166.7 units (167 units rounded to whole
number)
Question 6:
A cake shop has an annual demand rate of 1,000 cakes but can produce at an average
production rate of 2,000 cakes. If set up cost is $10, and carrying cost is $1. What is the optimal
number of units to be produced each year? Ans: 200 units
Question 7:
Suppose Bulk Shop sells sugar-free drinks for which the annual demand is 5,000 boxes. At the
moment, it is paying $6.40 per box, carrying cost is 25% of the unit cost, and ordering costs are
$25. A new supplier has offered to sell the same product for $6 if Bulk shop buys at least 3,000
boxes per order. Should Bulk Shop stick with the old supplier, or take advantage of the new
quantity discount? Ans: The new supplier will incur a total cost of $32,292 and is preferable, but
not by a large amount. If buying 3,000 boxes at a time raises problems of storage or freshness,
the company may very well wish to stay with the current supplier.
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Question 8:
A food processing company has gone out on a bid for a regular food item. Expected demand is
700 items per month. The item can be purchased from either A Suppliers or B Suppliers. Their
price lists are shown in the table below. Ordering cost I $50, and annual holding cost per unit is
$5.
A Suppliers B Suppliers
Quantity Unit Price Quantity Unit Price
1-499 $16.00 1-399 $16.10
500-999 $15.50 400-799 $15.60
1,000+ $15.00 800+ $15.10
I. What is the EOQ? Ans: 410
II. Which supplier should be used? Why? Ans: A Supplier has slightly lower cost.
III. What is the optimal order quantity and total annual cost of ordering, purchasing, and
holding the component? Ans: 1,000 @ total cost of $128,920
