Part one:

Homework: Chapter 6: Solve problems 6.25, 6.30, 6.37, 6.40, 6.49, and the case study
(Martin-Pullin Bicycle Corp.).

6-25: Shoe Shine is a local retail shoe store located on the north side of Centerville. Annual
demand for a popular sandal is 500 pairs, and John Dirk, the owner of Shoe Shine, has been in
the habit of ordering 100 pairs at a time. John estimates that the ordering cost is $10 per order.
The cost of the sandal is $5 per pair. For John’s ordering policy to be correct, what would the
carrying cost as a percentage of the unit cost have to be? If the carrying cost was 10% of the cost,
what would the optimal order quantity be?

6-26 In Problem 6-20, you helped Lila Battle determine the optimal order quantity for number 6
screws. She had estimated that the ordering cost was $10 per order. At this time, though, she
believes that this estimate was too low. Although she does not know the exact ordering cost, she
believes that it could be as high as $40 per order. How would the optimal order quantity change
if the ordering cost were $20, $30, and $40?

6-27 Ross White’s machine shop uses 2,500 brackets during the course of a year, and this usage
is relatively constant throughout the year. These brackets are purchased from a supplier 100
miles away for $15 each, and the lead time is 2 days. The holding cost per bracket per year is
$1.50 (or 10% of the unit cost), and the ordering cost per order is $18.75. There are 250 working
days per year.
What is the EOQ?
Given the EOQ, what is the average inventory? What is the annual inventory holding cost?
In minimizing cost, how many orders would be placed each year? What would be the annual
ordering cost?
Given the EOQ, what is the total annual inventory cost (including purchase cost)?
What is the time between orders?
What is the ROP?

6-28 Ross White (see Problem 6-27) wants to reconsider his decision of buying the brackets and
is considering making the brackets in-house. He has determined that setup cost would be $25 in
machinist time and lost production time and that 50 brackets could be produced in a day once the
machine has been set up. Ross estimates that the cost (including labor time and materials) of
producing one bracket would be $14.80. The holding cost would be 10% of this cost.
What is the daily demand rate?
What is the optimal production quantity?
How long will it take to produce the optimal quantity? How much inventory is sold during this
time?
If Ross uses the optimal production quantity, what would be the maximum inventory level? What
would be the average inventory level? What is the annual holding cost?
How many production runs would there be each year? What would be the annual setup cost?
Given the optimal production run size, what is the total annual inventory cost?

If the lead time is one-half day, what is the ROP?

6-29 Upon hearing that Ross White (see Problems 6-27 and 6-28) is considering producing the
brackets in-house, the vendor has notified Ross that the purchase price would drop from $15 per
bracket to $14.50 per bracket if Ross would purchase the brackets in lots of 1,000. Lead times,
however, would increase to 3 days for this larger quantity.
What is the total annual inventory cost plus purchase cost if Ross buys the brackets in lots of
1,000 at $14.50 each?
If Ross does buy in lots of 1,000 brackets, what is the new ROP?
Given the options of purchasing the brackets at $15 each, producing them in-house at $14.80,
and taking advantage of the discount, what is your recommendation to Ross White?

6-30: After analyzing the costs of various options for obtaining brackets, Ross White (see
Problems 6-27 through 6-29) recognizes that although he knows that the lead time is 2 days and
the demand per day averages 10 units, the demand during the lead time often varies. Ross has
kept very careful records and has determined that lead time demand is normally distributed with
a standard deviation of 1.5 units.
What Z value would be appropriate for a 98% service level?
What safety stock should Ross maintain if he wants a 98% service level?
What is the adjusted ROP for the brackets?
What is the annual holding cost for the safety stock if the annual holding cost per unit is $1.50?

6-37: Jim Overstreet, inventory control manager for Itex, receives wheel bearings from Wheel-
Rite, a small producer of metal parts. Unfortunately, Wheel-Rite can produce only 500 wheel
bearings per day. Itex receives 10,000 wheel bearings from Wheel-Rite each year. Since Itex
operates 200 working days each year, its average daily demand for wheel bearings is 50. The
ordering cost for Itex is $40 per order, and the carrying cost is 60 cents per wheel bearing per
year. How many wheel bearings should Itex order from Wheel-Rite at one time? Wheel-Rite has
agreed to ship the maximum number of wheel bearings that it produces each day to Itex when an
order has been received.

6-39: Linda Lechner is in charge of maintaining hospital supplies at General Hospital. During the
past year, the mean lead time demand for bandage BX-5 was 60. Furthermore, the standard
deviation for BX-5 was 7. Linda would like to maintain a 90% service level. What safety stock
level do you recommend for BX-5?

6-40 Linda Lechner has just been severely chastised for her inventory policy. (See Problem
6-39.) Sue Surrowski, her boss, believes that the service level should be either 95% or 98%.
Compute the safety stock levels for a 95% and a 98% service level. Linda knows that the
carrying cost of BX-5 is 50 cents per unit per year. Compute the carrying cost that is associated
with a 90%, a 95%, and a 98% service level.

6-49 Georgia Products offers the following discount schedule for its 4- by 8-foot sheets of good-
quality plywood:

ORDER UNIT COST ($)

9 sheets or less 18.00

10 to 50 sheets 17.50

More than 50 sheets 17.25

Home Sweet Home Company orders plywood from Georgia Products. Home Sweet Home has an
ordering cost of $45. The carrying cost is 20%, and the annual demand is 100 sheets. What do
you recommend?

Case Study Martin-Pullin Bicycle Corporation

Martin-Pullin Bicycle Corp. (MPBC), located in Dallas, is a wholesale distributor of bicycles and
bicycle parts. Formed in 1981 by cousins Ray Martin and Jim Pullin, the firm’s primary retail
outlets are located within a 400-mile radius of the distribution center. These retail outlets receive
their orders from Martin-Pullin within two days after notifying the distribution center, provided
that the stock is available. However, if an order is not fulfilled by the company, no backorder is
placed; the retailers arrange to get their shipment from other distributors, and MPBC loses that
amount of business.
Demands for AirWing Model

MONTH 2014 2015 FORECAST FOR 2016

January 6 7 8

February 12 14 15

March 24 27 31

April 46 53 59

May 75 86 97

June 47 54 60

July 30 34 39

August 18 21 24

September 13 15 16

October 12 13 15

November 22 25 28

December 38 42 47

Total 343 391 439

 The company distributes a wide variety of bicycles. The most popular model, and the major
source of revenue for the company, is the AirWing. MPBC receives all the models from a single
manufacturer overseas, and shipment takes as long as four weeks from the time an order is
placed. With the cost of communication, paperwork, and customs clearance included, MPBC
estimates that each time an order is placed, it incurs a cost of $65. The purchase price paid by
MPBC, per bicycle, is roughly 60% of the suggested retail price for all the styles available, and
the inventory carrying cost is 1% per month (12% per year) of the purchase price paid by MPBC.
The retail price (paid by the customers) for the AirWing is $170 per bicycle.
MPBC is interested in making an inventory plan for 2016. The firm wants to maintain a 95%
service level with its customers to minimize the losses on the lost orders. The data collected for
the past two years are summarized in the accompanying table. A forecast for AirWing model
sales in 2016 has been developed and will be used to make an inventory plan for MPBC.

Discussion Questions
1. Develop an inventory plan to help MPBC.

2. Discuss ROPs and total costs.

3. How can you address demand that is not at the level of the planning horizon?

Part two:

3.18 – Ken Brown is the owner of Brown oil, Bob makes the company a financial success and is
VP of finance. What decision criteria should Bob use?

Sub 100 – 300,000$ favorable, unfavorable -200,000$

Oiler J – 250,000, -100,000
Texan – 75,000 – 18,000

It was described that Bob is always a pessimistic decision maker, so it would be likely that he
would pick the “pessimistic” criterion. If we use the pessimistic criteria, he would most likely
pick the 3rd alternative equipment – Texan. The Texan will provide them with the smallest
possible loss, and Bob will chose this because it will lose the company the least amount of
money so the best alternative is to purchase equipment Texan. So it is most likely that Bob will
arrive at a different decision.

3.20 –
Stock Market: Good Economy 80,000 ; Poor Economy -20,000
(80,000 x 0.5) – (20,000 x 0.5) = $30,000
Bonds: 30,000 ; 20,000
(30,000 x 0.5) + (20,000 x 0.5) = $25,000

 CDs: 23,000 ; 23,000

(23,000 x 0.5) + (23,000 x 0.3) = $23,000
Probability: .5, I can send you the corresponding question if you need it to do the proofread.
(23,000 x 0.5) + (23,000 x 0.3) = $23,000
Probability: .5

a. Investing in the stock market would maximize Mickey’s expected profits.

b. The alternative is do nothing, under perfect forecast the expected value would be –
EVPI = 80,000 (.5) + 23,000 (.5) = 51,500 pay off
EVPI = 51,500 – 30,000

3.22 – Allen Young has been proud of his personal investments and done well over the past
years. He invests in the stock market. Allen must decide to invest 10k in SM or CD at interest
rate of 9%. If the market is good Allen believes he could get a 14% return, fair 8%, bad no
return. Allen estimates the probability of a good market is .4, fair .4 and bad is .2.

a. Decision table:
Decision Good Market Fair Market Bad Market EMV
Alternative
Stock Market 1,400 800 0 880
CDs 900 900 900 900
Probability 0.4 0.4 0.2

b. Using max EMV as decision, the largest average return is $900, so Allen should choose
alternative 2 – CD.

3.24 – Electronics manufacturing -

Large facility: Strong market – 550,000 ; fair – 110,000 ; poor -310,000
Medium: 300,000 ; 129,000 ; -100,000
Small: 200,000 ; 100,000 ; -32,000

a. Opportunity loss table – Find the largest potential gain and subtract payoffs of each alternative
from the largest potential gain.
Strong Market Fair Market Poor Market
Large 550,000 – 550,000 = 129,000 – 110,000 = 0 - -310,000 =
0 19,000 310,000
Medium 550,000 – 300,000 = 129,000 – 129,000 = 0 - - 100,000 =
250,000 0 110,000
Small 550,000 – 200,000 = 129,000 – 100,000 = 0 - - 32,000
350,000 29,000 =   32,000
No Facility 550,000 – 0 = 129,000 – 0 = 0-0 = 0
550,000 129,000

 b. Minimax regret is choosing alternative with min max opportunity loss using the opportunity
loss table. Choose maximum regret from each alternative (large 310,000 , medium 250,000 ,
small 350,000 , none 550,000)
Minmax regret = min(maximum regrets)
min {310,000 , 250,000, 350,000 , 550,000}

The minimax regret decision is to go for the Mid Sized facility and the corresponding minimax
regret loss in this case would be $250,000

3.26 – Megley Cheese: Jason Megley must decide how many cases of cheese spread to
manufacture each month. The probability will be six cases is .1, seven .3, eight .5, and nine .1.
Cost of each case is 45$ and price is 95$ any cases not sold are of no value at the end of the
month. How many cases should be manufactured.
Profit for each case is $50 = 95 – 45
6 7 8 9 EMV
6 50 x 6 = 300 300 300 300 300
7 50 x 6 – 45 = 50 x 7 = 350 350 350 340.5
255
8 (50 x 6) – (45 50 x 7 – 45 = 50 x 8 = 400 400 352.5
x 2) =  305
210
9 (50 x 6) – (45 (50 x 2) – (45 50 x 8 – 45 = 50 x 9 = 450 317
x 3) x 2) = 260 355
=        165
Probability 0.1 0.3 0.5 0.1
Based on the calculated EMV’s for each case, Jason would maximize his profits making 8 cases.

3.28 – Farm Grown – believes probability may not be reliable due to changing conditions – if
probabilities are ignored what decision should be made using optimistic and pessimistic
criterion..
Purchase price $5, selling $15, salvage value $3. Back order $16.

100 cases 200 cases 300 cases

100 case ordered 15 – 5 x 100 = 1000 (15 – 5) x 100 – (16 (15 – 5) x 100 – (16
x 100) = -600 x 200)
200 (15 – 5) x 100 + 15-5 x 200 = 2000 (15 – 5 ) x 200 – 16
(3-5) x 100 = 800 x 100 = 400
300 (15-5) x 100 + (15-5) x 200 + (3-5) 15 – 5 x 300 = 3000
(3-5 )x 200 = 600 x 100 = 1800
Probability 0.3 0.4 0.3

 Expected profit 100 cases = -600 ; 200 cases = 1160 ; 300 cases =1800
For the optimistic criterion, expected demand is 300, so 300 cases should be produces, for the
pessimistic criteria the demand is 100 so 100 cases should be produced.

Case Study Question :

1. Sue Pansky is a risk avoider and conservative, she can invest in corporate bonds if she
wants to avoid the most risk and because she does not have a stable income anymore. Should the
business go under, she is still guaranteed $20,000, which is the maximum return for the worst
case scenario.

2. Ray is a commodity broker and considers and investment and believes he will have 11%
success in investing. He has both good experience and knowledge on trading and business, he
can also take in account how the current market is doing and if there is a high demand for the
services/product the company distributes. If he truly does not want to take any risk he should not
obtain common stock because his expected return is 88% , Ray should actually go in for
corporate bonds which have better returns.

Reference Book in case you need it.

Render, B., Stair Jr., R. M., Hanna, M. E., & Hale, T. S. (2018). Quantitative analysis for
management (13th ed.). Pearson. ISBN: 9780134543161.