2020 Summer

Inventory Problems

Inventory Problems

1. A bakery buys flour in 25-pound bags. The bakery uses 1,215 bags a year. Ordering cost
is $10 per order. Annual carrying cost is $75 per bag.

a. Determine the economic order quantity.

b. What is the average number of bags on hand?
c. How many orders per year will there be?
d. Compute the total cost of ordering and carrying flour.
e. If holding costs were to increase by $9 per year, how much would that affect the minimum
total annual cost?

Solution
Given

D = 1215 bags/year
Order Cost = $10/order
Carrying cost = $75/bag/year

a. EOQ = √ (2 ×10 ×1215)/75 = 18 bags

b. Average no of bags = 18/2 =9 bags

c. No of order = D/EOQ = 1215/18 =67.5

18
d. TC = Order cost+ Carrying cost = 10×1215/18 + 75× =¿675+675=1350
2

e. If holding costs were to increase by $9, then new holding cost/ Carrying cost
=84(75+9=84)

Then EOQ =17.00, EOQ = √ (2 ×10 ×1215)/84 = 17 bags

Total Cost = 714.70+714=1428.7

Inventory cost increase by = 1428.7-1350 =78.7

Answer question no 1
a. 18 bags
b. 9 bags
c. 67.5
d. $1350
e. Increase by $78.71

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Inventory Problems

2. A large law firm uses an average of 40 boxes of copier paper a day. The firm operates
260 days a year. Storage and handling costs for the paper are $30 a year per box, and it costs
approximately $60 to order and receive a shipment of paper.

a. What order size would minimize the sum of annual ordering and carrying costs?
b. Compute the total annual cost using your order size from part a.
c. Except for rounding, are annual ordering and carrying costs always equal at the EOQ?
d. The office manager is currently using an order size of 200 boxes. The partners of the firm
expect the office to be managed “in a cost-efficient manner.” Would you recommend that
the? office manager uses the optimal order size instead of 200 boxes. Justify your answer.

Solution
D = 40 boxes / day
Firm operates 260 days a year
Then annual demand is = 40 boxes/day * 260 days/ year = 10400 boxes/year
Order Cost = $60/order
Carrying cost = $30/box/year

a. EOQ = √ (2 ×60 ×10400)/30 = 203.96 box ≅ 204

b. TC = Order cost+ Carrying cost =

204
60×10400/204 + 30× =¿3058.82+3060=6118.82
2

d. here Q = 200 boxes

200
Total Cost = 60×10400/200 + 30× =¿ 3120+3000=6120
2

Savings = 6120-6118.82 = 1.18

Answer question no 2
a. 204 packages
b. $6118.82
c. Yes
d. No, TC=$6120, only save $1.18

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Inventory Problems

3. Garden Variety Flower Shop uses 750 clay pots a month. The pots are purchased at $2
each. Annual carrying costs per pot are estimated to be 30 percent of cost, and ordering costs
are $20 per order. The manager has been using an order size of 1,500 flower pots.

a. What additional annual cost is the shop incurring by staying with this order size?

Answer question no 3
a. $105.29

Solution
D = 750 clay pots / month
Then annual demand is = 750 clay pots /month * 12 month/ year = 9000 pots/year
Order Cost = $20/order
Carrying cost = 30% of $2 = $0.6/pot/year

EOQ = √ (2 ×20 × 9000)/0.6 = 774.59 pots ≅ 775

TC = Order cost+ Carrying cost =

7 75
20×9000/775 + 0.6× =¿232.25+232.5=464.75
2

Current order size Q = 1500 pots

15000
Total Cost = 20×9000/1500 + 0.6× =¿120+450=570
2

a. Annul cost incur if the order size is 1500 = 570-464.75=105.25

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Inventory Problems

4. A produce distributor uses 800 packing crates a month, which it purchases at a cost of
$10 each. The manager has assigned an annual carrying cost of 35 percent of the purchase
price per crate. Ordering costs are $28. Currently the manager orders once a month. How
much could the firm save annually in ordering and carrying costs by using the EOQ?

Answer question no 4
$364

Solution
D = 800 packing crates / month
Then annual demand is = 800 packing crates / month * 12 month/ year = 9600 crates/year
Order Cost = $28/order
Carrying cost = 35% of $10 = $3.5/crate/year

EOQ = √ (2 ×28 × 9600)/3.5 = 391.91 crates ≅ 392

TC = Order cost+ Carrying cost =

392
28×9600/392 + 3.5× =¿685.71+686=1371.71
2

Current order size Q = 9600/12 = 800

Explanation
Order once a month
So total order in year =12
Total order formula = D/Q
Here 12 = D/Q ; 12 =9600/Q =800

Total cost when Q =800

800
Total Cost = 28×9600/800+ 3.5× =¿ 336+1400=1736
2

a. Savings = 1736-1371.71=364.29

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Inventory Problems

5. A manager receives a forecast for next year. Demand is projected to be 600 units for the
first half of the year and 900 units for the second half. The monthly holding cost is $2 per
unit, and it costs an estimated $55 to process an order.

a. Assuming that monthly demand will be level during each of the six-month periods covered
by the forecast (e.g., 100 per month for each of the first six months), determine an order size
that will minimize the sum of ordering and carrying costs for each of the six-month periods.

Answer question no 5
a. 1-6 month = 74 units, 7-12 month =91 units

Solution

For First six month

D1 = 600 units for first half of the year (January -June)
Then Demand per month = 600/6 =100 unit/month
Carrying cost =$ 2 /unit/month
Order Cost = $55/order

EOQ1 = √ (2 ×55 ×100)/2 = 74.16 unit ≅ 74

For last six month

D2 = 900 units for second half of the year (July -December)
Then Demand per month = 900/6 =150 unit/month
Carrying cost = $2 /unit/month
Order Cost = $55/order

EOQ1 = √ (2 ×55 ×150)/2 = 90.82 unit ≅ 92

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2020 Summer
Inventory Problems

6. A food processor uses approximately 27,000 glass jars a month for its fruit juice product.
Because of storage limitations, a lot size of 4,000 jars has been used. Monthly holding cost is
18 cents per jar, and reordering cost is $60 per order. The company operates an average of 20
days a month.

a. What penalty is the company incurring by its present order size?

b. The manager would prefer ordering 10 times each month but would have to justify any
change in order size. One possibility is to simplify order processing to reduce the ordering
cost. What ordering cost would enable the manager to justify ordering every other day (i.e.,
10 times a month)?

Answer question no 6
a. $1.32
b. $54.20

Solution

D = 27,000 glass jars/month

Carrying cost = $0.18 /unit/month
Order Cost = $60/order

EOQ = √ (2 ×60 ×27000)/0.18 = 4242.64 ≅ 4243

4243
Total Cost = 60×27000/4243+ 0.18× =¿381.80+381.87=763.67
2

Current Q =400 glass jar/month

Then TC for this quantity
4000
Total Cost = 60×27000/4000+ 0.18× =¿405+360=765
2

More cost for not follow EOQ = 765-763.67 =1.33

b.

D = 27,000 glass jars/month

Carrying cost = $0.18 /unit/month

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Inventory Problems

Order Cost = $X per order ( assume)

TC at EOQ =763.67 ( from earlier part)

They want 10 order but want to keep TC at minimum ( TC is minimum at EOQ and that is
763.67 ( we find it out from earlier calculation)

10 order in a month , then Q =27000/10 =2700glass jar

2700
763.67 = X×27000/2700+ 0.18× =¿10X+243=763.67
2

Then , 10X = 763.67-243 =520.67

X = 520.67/10 =52.06

7. The Friendly Sausage Factory (FSF) can produce hot dogs at a rate of 5,000 per day. FSF
supplies hot dogs to local restaurants at a steady rate of 250 per day. The cost to prepare the
equipment for producing hot dogs is $66. Annual holding costs are 45 cents per hot dog. The
factory operates 300 days a year. Find the following:

a. The optimal run size

b. The number of runs per year
c. How many days it takes to produce the optimal run quantity

Answer question no 7

a. 4812
b. 15.59 (approximately 16)
c. 0.96

8. A chemical firm produces sodium bisulfate in 100-pound bags. Demand for this product
is 20 tons per day. The capacity for producing the product is 50 tons per day. Setup costs
$100, and storage and handling costs are $5 per ton a year. The firm operates 200 days a year.
(Note: 1 ton = 2,000 pounds.)

a. How many bags per run are optimal?

b. What would the average inventory be for this lot size?
c. Determine the approximate length of a production run, in days.
d. About how many runs per year would there be?
e. How much could the company save annually if the setup cost could be reduced to $25 per
run?
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Inventory Problems

Answer question no 8
a. 10,328 bags
b. 3,098 bags
c. 10.33 days
d. 7.75 (approx. 8)
e. $774.50

9. A company is about to begin production of a new product. The manager of the department that
will produce one of the components for the product wants to know how often the machine used
to produce the item will be available for other work. The machine will produce the item at a rate
of 200 units a day. Eighty units will be used daily in assembling the final product. Assembly will
take place five days a week, 50 weeks a year. The manager estimates that it will take almost a full
day to get the machine ready for a production run, at a cost of $300. Inventory holding costs will
be $10 a year.

a. What run quantity should be used to minimize total annual costs?

b. How many days does it take to produce the optimal run quantity?
c. What is the average amount of inventory?
d. If the manager wants to run another job between runs of this item, and needs a minimum of 10
days per cycle for the other work, will there be enough time?
e. Given your answer to part d, the manager wants to explore options that will allow this other job
to be performed using this equipment. Name three options the manager can consider.

Answer question no 9

a. 1,414 units
b. 7.07 days
c. 424 units
d. No
e. Approximately 54 units, $168

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