ASSIGNMENT 3 (70 Marks)

Question 1 ( 21 Marks )

Mark is a purchasing manager for Edgars in the men’s clothing department. A certain
imported brand for Jeans have an annual demand of 4000 jeans. The cost for each jean is
R90 and the inventory carrying cost for each jean is 10% of the cost of each jean. The
average ordering cost for each order is R25.
It takes approximately 2 weeks for an order to arrive at Edgars from placement of order,
also the weekly demand for jeans are approximately 80.

For Mark to optimize his department in terms of cost he wants to know the following:
a) What is the EOQ? (3)
b) What is the ROP? (3)
c) What is the average inventory? (3)
d) What is annual holding cost? (3)
e) How many orders on an annual basis should be placed? (3)
f) What is the annual ordering cost? (3)
g) What is the total annual inventory cost, including purchasing cost? (3)

Question 2 ( 16 Marks )

In a different Edgars store the demand for jeans are a 1000 jeans annually. The cost for
each jean is R50 and the inventory carrying cost for each jean is 25% of the cost of each
jean. The average ordering cost for each order is R40.
If the jeans are ordered in quantities of 200 per order Edgars can get a 3% discount on the
cost of a jean.
Should Edgars take this offer?

a. What is the EOQ for no discount? (3)

b. What is the EOQ for the discount option? (4)
c. What is the total annual inventory cost for no discount? (3)
d. What is the total annual inventory cost including purchasing cost
for the discount option? (4)
e. Should Edgars take the discount option? Explain why. (2)

Question 3 ( 23 Marks )

For the rugby world cup a famous rugby ball brand name decided to supply a 2015
springbok signed rugby ball on a discount basis to all the rugby fans. The annual demand
is 150 rugby balls and the cost of each of these rugby balls is R2 300. The holding cost is
estimated at 10% of the unit cost and the ordering cost is R76.65 per order. The rugby ball
manufacturer recently sent the following quantity discount schedule for these special balls
to all their outlets country wide:
CMPG322
 Options Quantity ordered Discount (%) Discount cost
1 1 - 15 0% R2 300
2 16 - 30 5% R2 185
3 31 and more 8% R2 116

a) Assume that the demand is constant. Calculate the following:

1. EOQ for each option. (6)

2. Total cost for each option. (11)
(tip: To calculate total cost, adjust the quantity ordered to the minimum order level for
option 2 and 3)
3. Which discount option should the company select?
Motivate your answer. (2)

b) Suppose that this rugby ball manufacturer operates 300 days per year and it takes 4
days for the delivery of a new order. What is the reorder point? (4)

TOTAL : 70

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FORMULAS/FORMULES
total arrivals
Average=
total number of simulation trials

=∑ ( Probability of i cars )( Arrival of i cars )

Expected hourly cars
Equations 1 through 7 describe operating characteristics in the single-channel model that has
Poisson arrival and exponential service rates (M/M/1).
λ
1. L = μ−λ
1
2. W = μ−λ
2
λ
3.
Lq = μ (μ−λ )
λ
4.
Wq = μ (μ−λ )
λ
5. ρ = μ
λ
P0
1−
6. = μ
k+1
λ
7.
Pn>k =
()μ
Equations 8 through 13 describe operating characteristics in multi-channel models that have
Poisson arrival and exponential service rates, where m = the number of open channels (M/M/m).
1
P0 =
n=m−1 n m

8.
[ ∑
n=0
1 λ
n! μ
m
( ) ] ( ) mμ−λ
+
1 λ
mμ
m! μ
λμ ( λ /μ ) λ
L= 2
P0 +
9. ( m−1 ) ! ( mμ−λ ) μ
λμ ( λ/ μ )m 1 L
W= P + =
2 0 μ
10. ( m−1 ) ! ( mμ−λ ) λ
λ
Lq =L−
11. μ
1 L
W q =W − = q
12. μ λ
λ
ρ=
13. mμ

CMPG322
FORMULAS

Moving average=
∑ (sum of demands in previous n periods ) (Exponential smoothing) Ft+1 = Ft + (Yt – Ft)
n

e rror =A ctual value−Forecast value MAD =

∑|error|
n

Average 3-year demand ∑ error

Seasonal index = Bias =
Average quarterly demand n

2DC0

EOQ=Q ¿ =
√ 2DC 0
Ch
EOQ=Q*=
Ch
√ IC
EOQ with expressed as percentage of unit
cost.
D
ROP = d x L
d= working days

Q Q
C
average inventory = 2 annual holding cost = 2 h

D D
C
number of orders per time period = Q annual ordering cost = Q 0

D Q D Q
Total cost = C 0+ C h C0 + Ch +DC
Q 2 Total cost = Q 2
Total relevant inventory cost. Total inventory cost (including purchase cost).

2DCs

√( Q d
( )
¿
Optimal production quantity =Q = 1−
d
C h 1−
p ) average inventory = 2 p

D Q d
Q
annual holding cost = 2
d
1− C h
p ( ) Total cost = Q ( )
C s + 1- C h +DC
2 p
Total inventory cost (including production cost)

SS = Z

CMPG322