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Tutorial 2

This document contains 6 tutorials with questions about inventory management and determining optimal order quantities. Tutorial 1 asks questions about determining the economic order quantity, reorder point, average inventory, holding costs, number of orders, and ordering costs for a store that sells earphones. Tutorial 2 asks about minimizing costs for a firm that purchases paper. The remaining tutorials ask similar questions about determining optimal order quantities, inventory costs, reorder points, and time between orders for different companies and products.

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Puvithera A/P Gunasegaran
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© © All Rights Reserved
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64 views

Tutorial 2

This document contains 6 tutorials with questions about inventory management and determining optimal order quantities. Tutorial 1 asks questions about determining the economic order quantity, reorder point, average inventory, holding costs, number of orders, and ordering costs for a store that sells earphones. Tutorial 2 asks about minimizing costs for a firm that purchases paper. The remaining tutorials ask similar questions about determining optimal order quantities, inventory costs, reorder points, and time between orders for different companies and products.

Uploaded by

Puvithera A/P Gunasegaran
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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BDS4614, MANAGEMENT DECISION SCIENCE

Tutorial 2

1. A earphone store has an annual demand of 4000 units. The cost of each earphone is RM90, and the
inventory carrying cost is estimated to be 10% of the cost of each earphone. The average ordering cost
is RM25 per order. It takes about two weeks for an order to arrive from the supplier, and during this
time the demand per week for the earphones is 80.

a. What is the Economic Quantity Order?


b. What is the reorder point?
c. What is the average inventory?
d. What is the annual holding cost?
e. How many orders per year would be placed?
f. What is the annual ordering cost?
g. If the supplier offers a 5% discount on the cost of the earphones if the orders in quantities of 200 or
more, should the store take the quantity discount? Assume the demand is constant.

2. A consulting firm is trying to determine how to minimize the costs associated with purchasing paper.
Paper is consumed at the rate of 30 reams per day. Each time an order is placed an ordering cost RM100
is incurred and the holding cost per ream per day is 1% of the unit purchase cost. Suppose no shortage is
allowed and that the purchasing cost per ream is RM12 for any quantity not exceeding 300 reams and
RM10 otherwise. Determine the optimal inventory policy, given a 15 days lead time.

3. The Sandakan Timber company processes 10,000 logs annually, operating 250 days per year. The
company has estimated that the ordering cost is RM1,600 per order, the cost of carrying logs in
inventory before they are processed is RM15 per log on an annual basis and it takes 4 days to receive
the order from the supplier. Determine the following.

a. The economic order quantity


b. The minimum total annual inventory cost.
c. The optimal number of orders per year
d. The average inventory level
e. The optimal time between orders
f. The amount of logs that should be on hand when an order is placed

4. Alexis Generator Technologies Company purchases a special component used in the manufacturing of
automobile generators, directly from its suppliers. The generator production operation, which is
operated at a constant rate, will require 1200 components per month throughout the year. Assume that
the ordering costs are RM20 per order, the unit cost is RM2 per component, and annual holding costs
are 20% of the value of the cost price. The company has 300 working days per year, and the lead time is
5 days.
The management at Alexis Generator Technologies plans to set their inventory policy and wants to
determine the following:

a. Compute the Economic Order Quantity (EOQ) for the component.


b. Based on the optimum order quantity, determine the reorder point.
c. Calculate the total inventory cost based on the current ordering policy.
d. Determine the time between orders.

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BDS4614, MANAGEMENT DECISION SCIENCE

5. Boris is the purchasing agent for New Era Valve, which sells industrial valves and fluid control devices.
One of the most popular valves is the Mi6, which has an annual demand of 4,000 units. The cost of each
Mi6 valve is $90, and the inventory carrying cost is estimated to be 10% of the cost of each valve. Boris
has made a study of the costs involved in placing an order for Mi6 valves and he had estimated that the
average ordering cost is $25 per order. Furthermore, it takes about two weeks for an order to arrive from
the supplier, and during this time the demand per week is approximately 80 units.

a. What is the Economic Order Quantity?


b. What is the Re-Order Point?
c. What is the average inventory? What is the annual holding cost?
d. How many orders per year would be placed? What is the annual ordering cost?

6. Somerset Corporation purchases a particular brand of microchip used in the assembly of computers
directly from the supplier. It costs the company RM8 each time it places an order with the manufacturer
for the microchips. The supplier will deliver order of any size for a charge of RM4 and cost of holding
an item in inventory for a year is estimated to be 20% of the cost price. Samuel, the store manager
estimates that total annual demand for the microchip will be 600 units, with a constant demand rate
throughout the year. Currently, the store is making 250 orders, two times in a month. Goods are
received 10 days after an order has been placed. The store is open for business 300 days in a year.

a) Calculate the total inventory cost based on the current ordering policy.
b) Compute the optimum order quantity and calculate the associated minimum total inventory cost.
c) Based on the optimum order quantity, determine the reorder point.
d) If the supplier offers large order discounts of 8% and 10% for single order quantities of minimum
400 and 500 respectively, should the company change its ordering policy?

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