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Assignment Week 5

This document contains details for two cases to analyze inventory management using the economic order quantity (EOQ) model. Case 4 provides details on a bicycle distributor analyzing inventory for a girl's bicycle model selling at 250 per month. It asks to calculate the optimal order quantity and costs using the basic EOQ model, and then to recalculate using a model allowing for planned shortages. Case 5 provides details on a monitor manufacturer using the EOQ model with gradual replenishment. It provides sales and production details for a new monitor model and asks to calculate the optimal production lot size, costs, production run length, and maximum inventory level.

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Thanh Thanhh
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700 views

Assignment Week 5

This document contains details for two cases to analyze inventory management using the economic order quantity (EOQ) model. Case 4 provides details on a bicycle distributor analyzing inventory for a girl's bicycle model selling at 250 per month. It asks to calculate the optimal order quantity and costs using the basic EOQ model, and then to recalculate using a model allowing for planned shortages. Case 5 provides details on a monitor manufacturer using the EOQ model with gradual replenishment. It provides sales and production details for a new monitor model and asks to calculate the optimal production lot size, costs, production run length, and maximum inventory level.

Uploaded by

Thanh Thanhh
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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PRACTICE FOR GROUP WORK WEEK 5

Case 4 – EOQ model for Speedy Wheels


Speedy Wheels is a wholesale distributor of bicycles for the western United States. Its
Inventory Manager, Ricky Sapolo, is currently reviewing the inventory policy for one popular
model — a small, one-speed girl's bicycle that is selling at the rate of 250 per month. The
administrative cost for placing an order for this model from the manufacturer is $200 and the
purchase price is $70 per bicycle. The annual cost of the capital tied up in inventory is 20 percent
of the value of these bicycles. The additional cost of storing the bicycles — including leasing
warehouse space, insurance, taxes, and so on — is $6 per bicycle per year.
a. Use the basic EOQ model to determine the optimal order quantity and the total variable
inventory cost per year.
b. Speedy Wheel’s customers (retail outlets) generally do not object to short delays in
having their orders filled. Therefore, management has agreed to a new policy of having small
planned shortages occasionally to reduce the variable inventory cost. After consultations with
management, Ricky estimates that the annual shortage cost (including lost future business) would
be $30 times the average number of bicycles short throughout the year. Use the EOQ model with
planned shortages to determine the new optimal inventory policy.
c. Compare the 2 inventory policies from parts a and b.

Case 5 – EOQ model for Color View


Color View is a manufacturer of color monitors for personal computers. The company uses
the EOQ model with gradual replenishment to determine the production lot sizes for its various
models.
Color View’s newest monitor is the X-435 model. The company expects sales of this model
to run at the rate of 6,000 per year for a while. The facilities for producing this model are shared
with several other models. While these production facilities are devoted to the X-435 model, the
production rate is 2,000 monitors per month. The cost each time the facilities are set up for a
production run for this model is $7,500. The annual cost of holding each of these monitors in
inventory is estimated to be $120.
a. Determine what the production lot size should be according to the EOQ model with
gradual replenishment. Also find the corresponding annual setup cost, annual holding
cost, and total variable inventory cost per year.
b. How long should each production run last and how frequently should they occur?
c. What is the maximum inventory level? Why is this less than the production lot size?

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