Ch – 13 Inventory Management

Problems
Q1.
a. Determine an A-B-C classification for these items:
Unit Annual
Items Cost Volume(00)
1 $ 100 25
2 80 30
3 15 60
4 50 10
5 11 70
6 60 85
7 10 60
b. Find the EOQ given this information: D = 4,500 units/year, S = $36, and H = $10 per unit per
year.
c. Find the economic production quantity given this information. D = 18,000 units/year, S = $100,
H = $40 per unit per year, p = 120 units per day. and u = 90 units/day
Ans.
a. Calculate Annual Dollar Usage:
Annual Dollar Usage = Unit Cost * Annual Volume
Annual
Unit Annual Dollar
Items
Cost Volume (00) Usage
($)
1 $100 25 $2,500
2 $80 30 $2,400
3 $15 60 $900
4 $50 10 $500
5 $11 70 $770
6 $60 85 $5,100
7 $10 60 $600

%age
Annual
of
Dollar Percentage
Items Classification annual
Usage of items
dollar
($)
value
6 5,100
1 2,500 A 42.86% 78.3
2 2,400
3 900
B 28.57% 13.08
5 770
7 600
C 28.57% 8.62
4 500
12,770 100.00% 100

b. EOQ Calculation:
 Given:
D=4,500 units/year
S=36 dollars per order
H=10 dollars per unit per year
The EOQ (Economic Order Quantity) formula is:

Exact value = 178.88 units

c. Economic Production Quantity (EPQ):

Given:
D = 18,000 units/year
S = 100 dollars per setup
H = 40 dollars per unit per year
p = 120 units/day (production rate)
u = 90 units/day (usage rate)

Q3. 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?
Ans.
a. Given Information:
D =1,215 bags per year (annual demand)
S =10 dollars per order (ordering cost)
H =75 dollars per bag per year (annual carrying cost)

b.

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?

If the holding cost increases by $9 per bag per year, the new holding cost becomes:

The increase in the total cost due to the increase in holding costs is:
Increase in cost=1,429−1,350=79 dollars
Thus, the minimum total annual cost increases by 79 dollars.
Q7. 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.
b. Why is it important to be able to assume that demand will be level during each six-month period?
c. If the vendor is willing to offer a discount of $10 per order for ordering in multiples of 50 units (e.g., 50,
100, 150), would you advise the manager to take advantage of the offer in either period? If so, what order
size would you recommend?
Ans.
a.
b. Assuming that demand is level (constant) during each period simplifies the analysis. When demand fluctuates
significantly, the ordering and carrying costs vary accordingly, making it more challenging to determine an
optimal order quantity. A level demand allows the use of the EOQ model, which is based on the assumption of
consistent demand, leading to more predictable and manageable inventory costs.

c. Considering the Vendor’s Discount for Multiples of 50 Units

Q14. A jewellery firm buys semiprecious stones to make bracelets and rings. The supplier quotes a price of $8
per stone for quantities of 600 stones or more, $9 per stone for orders of 400 to 599 stones. and $10 per stone for
lesser quantities. The jewellery firm operates 200 days per year. Usage rate is 25 stones per day, and ordering
costs are $48.
a. If carrying costs are $2 per year for each stone, find the order quantity that will minimize total annual cost.
b. If annual carrying costs are 30 percent of unit cost, what is the optimal order size?
c. If lead time is six working days, at what point should the company reorder?
Ans.
a. Order Quantity That Minimizes Total Annual Cost
Given Data:
Price per
Number of Stones
Stone
$10 1-399
$9 400-599
$8 600+
  Usage rate: 25 stones/day
 Number of working days: 200 days/year
 Ordering cost: $48 per order
 Carrying costs (in part a): $2 per stone/year
 Lead time: 6 days

(b) Optimal Order Size with Carrying Costs at 30% of Unit Cost
If the carrying cost is 30% of the unit cost, then:

Now we calculate EOQ for each price range.

Since this EOQ is below 600, this order size wouldn't qualify for the $8 price range.
Thus, the optimal order size is 421 stones at $9 per stone.
(c) Reorder Point
The reorder point is based on lead time and usage rate. It is calculated as:

Q18. A newspaper publisher uses roughly 8000 feet of baling wire each day to secure bundles of newspa pers
while they are being distributed to carriers. The paper is published Monday through Saturday Lead time is six
workdays, what is the appropriate reorder point quantity, given that the company desires a service level of 95
percent, if that stockout risk for various levels of safety stock is as follows: 1,500 feet, .10; 1,800 feet, .05; 2,100
feet, .02; and 2,400 feet, .01?
Ans.
Given Information:
 Daily usage of baling wire = 8,000 feet
 Paper is published Monday through Saturday (6 days/week)
 Lead time = 6 working days
 Desired service level = 95%
 Stockout risks for various levels of safety stock:
 o 1,500 feet: 10% (0.10)
o 1,800 feet: 5% (0.05)
o 2,100 feet: 2% (0.02)
o 2,400 feet: 1% (0.01)
Step-by-Step Solution:

Q19. Given this information:

Expected demand during lead time = 300 units
Standard deviation of lead time demand = 30 units
Determine each of the following, assuming that lead time demand is distributed normally:
a. The ROP that will provide a risk of stockout of 1 percent during lead time.
b. The safety stock needed to attain a 1 percent risk of stockout during lead time
c. Would a stockout risk of 2 percent require more or less safety stock than a 1 percent risk? Would the ROP be
larger, smaller, or unaffected if the acceptable risk were 2 percent instead of I percent? Explain.
Q20. Given this information:
Lead-time demand = 600 pounds
Standard deviation of lead time demand = 52 pounds (Assume normality.)
Acceptable stockout risk during lead time = 4 percent
a. What amount of safety stock is appropriate?
b. When should this item be reordered?
c. What risk of stockout would result from a decision not to have any safety stock?
Ans.
a. Amount of Safety Stock
To calculate safety stock, we need to find the Z-score corresponding to the acceptable stockout risk and then
use the following formula:
Safety Stock = Z × σ
Where:
 Z is the Z-score for the desired service level
 σ is the standard deviation of lead-time demand = 52 pounds
For an acceptable stockout risk of 4%, the service level is 96%. Using standard normal distribution tables,
the Z-score corresponding to a 96% service level is approximately 1.75.

Now, we can calculate the safety stock:

Safety Stock=1.75×52=91pounds

So, the appropriate amount of safety stock is 91 pounds.

b. Reorder Point
The reorder point is the sum of the lead-time demand and safety stock:
Reorder Point = Lead-time Demand + Safety Stock
Substituting the values:
Reorder Point = 600 + 91 = 691pounds
Therefore, the item should be reordered when the inventory level falls to 691 pounds.

c. Risk of Stockout with No Safety Stock

If no safety stock is maintained, the reorder point would be equal to the lead-time demand (600 pounds),
without the extra buffer provided by the safety stock.

The risk of stockout would then be based on the probability that demand during the lead time exceeds
600 pounds. To calculate this, we find the Z-score for 600 pounds when there is no safety stock:

Z = 600 -600 / 52 = 0

A Z-score of 0 corresponds to a 50% service level. Since the service level is 50%, the stockout risk is
50%.

Thus, without any safety stock, the risk of stockout would be 50%.
Q29. A service station uses 1,200 cases of oil a year. Ordering cost is $40, and annual carrying cost is $3 per
case. The station owner has specified a service level of 99 percent.
a. What is the optimal order quantity?
b. What level of safety stock is appropriate if lead time demand is normally distributed with a mean of 80 cases
and a standard deviation of 6 cases?
Ans.
Given Information:
 Annual demand (DDD) = 1,200 cases of oil
 Ordering cost (SSS) = $40 per order
 Annual carrying cost (HHH) = $3 per case
 Service level = 99%
 Lead time demand: mean = 80 cases, standard deviation = 6 cases
Conclusion:
 The optimal order quantity (EOQ) is 179 cases.
 The appropriate level of safety stock is 14 cases.

Q36. Skinner's Fish Market buys fresh Boston bluefish daily for $4.20 per pound and sells it for $5.70 per
pound. At the end of each business day, any remaining bluefish is sold to a producer of cat food for $2.40 per
pound. Daily demand can be approximated by a normal distribution with a mean of 80 pounds and a standard
deviation of 10 pounds. What is the optimal stocking level?
Q39. Burger Prince buys top-grade ground beef for $1.00 per pound. A large sign over the entrance guarantees
that the meat is fresh daily. Any leftover meat is sold to the local high school cafeteria for 80 cents per pound.
Four hamburgers can be prepared from each pound of meat. Burgers sell for 60 cents each. Labor, overhead,
meat, buns, and condiments cost 50 cents per burger. Demand is normally distributed with a mean of 400
pounds per day and a standard deviation of 50 pounds per day. What daily order quantity is optimal? (Hint:
Shortage cost must be in dollars per pound.)