Name: Precious Jewel “Aeious” Posadas Date: April 14, 2022

Section: BA3201 Subject: Inventory Management

PRACTICE PROBLEMS FOR LOT- SIZING

HEURISTICS

1. The monthly demand for an item over six (6) months is 32, 19, 12, 15, 23, 12units, respectively.
Using the lot-for-lot method. Determine the total inventory cost if the holding is P 1.5 per unit
month and the ordering cost is P40 per order.

OC P40 per order

H P 1.5 per unit per period

Literation 1

Start the solution process by placing an order for 36 units in January.

Month Jan Feb Mar Apr May Jun

Demand
(kg) 32 19 12 15 23 12

Cost incurred for January

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of P40.

Holding cost Assume that the ordered quantity will be received in full at the beginning of
January. Thus, the inventory level at the beginning of January would be 32 units,
and that at the end of January would be 0. The leverage inventory level in
January would, therefore, be

32+0
¿ 2
= 16 units

The holding cost for January would be 16 x P 1.5 or P24

Literation 2

Next, place an order for 60 units at the beginning of February that will completely meet the demand for
that month.

Jan Feb Mar Apr May Jun

Month
Demand 32 19 12 15 23 12
(Kg)

Cost incurred for February

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of P 40

Holding cost Assume that the ordered quantity will be received in full at the beginning of February.
Thus, the inventory level at the beginning of February would be 19 units, and that at the
end of February would be 0. The average inventory level in February would, therefore,
be

19+ 0
¿ 2

= 9.5 units

The holding cost for February would be P9.5 x P 1.5 or P 14.25

Literation 3

Next, place an order for 60 units at the beginning of February that will completely meet the demand for
that month.

Month Jan Feb Mar Apr May Jun

Demand
(kg) 32 19 12 15 23 12

Costs incurred for March

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of P40

Holding cost Assume that the ordered quantity will be received in full at the beginning of March.
Thus, the inventory level at the beginning of March would be 12 units, and that at the
end of March would be 0. The average inventory level in March would, therefore, be

12+0
¿ 2
= 6 units
 The holding cost for April would be P6 x P 1.5 or P 9

Literation 4

Next, place an order for 60 units at the beginning of February that will completely meet the demand for
that month.

Month Jan Feb Mar Apr May Jun

Demand
(kg) 32 19 12 15 23 12

Cost incurred for April

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of P40

Holding cost Assume that the ordered quantity will be received in full at the beginning of April. Thus,
the inventory level at the beginning of April would be 15 units, and that at the end of
April would be 0. The average inventory level in April would, therefore, be

15+ 0
¿ 2

= 7.5 units

The holding cost for April would be P7.5 x P 1.5 or P 11.25

Literation 5

Next, place an order for 60 units at the beginning of February that will completely meet the demand for

Cost incurred for May that month.

Month Jan Feb Mar Apr May Jun

Demand (kg)
32 19 12 15 23 12

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of P40

Holding cost Assume that the ordered quantity will be received in full at the beginning of May. Thus,
the inventory level at the same beginning of May would be 23 units, and that at the end
of May would be 0. The average inventory level in May would, therefore, be

23+ 0
¿ 2

` = 11.5 units
 The holding cost for May would be P11.5 x P 1.5 or P17.25

Literation 6

Next, place an order for 60 units at the beginning of February that will completely meet the demand for
that month.

Month Jan Feb Mar Apr May Jun

Demand
(kg) 32 19 12 15 23 12

Cost incurred for June

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of P40

Holding cost Assume that the ordered quantity will be received in full at the beginning of June. Thus,
the inventory level at the beginning of June would be 12 units, and that at the end of
June would be 0. The average inventory level in June would, therefore, be

12+0
¿ 2
= 6 units

The holding cost for June would be P6 x P1.5 or P9

Using the same technique, the total inventory costs, assuming that an order is placed at the beginning
of each month, would completely satisfy the demand for the month. Thus, if the lot- of- lot method
would be used, the total inventory cost would be P747.77

Month Ordering cost Holding cost Total cost

January P40 P24 P64
February P40 P14.25 P54.25
March P40 P9 P49
April P40 P11.25 P51.25
May P40 P17.25 P57.25
June P40 P9 P49
Total P240 P84.75 P324.75
Lot for lot solution Summary
2. The monthly demand for an item over six (6) months is 32, 19, 12, 15, 23, and 12 units respectively.
Using the Part Period balancing method, determine the total inventory cost if the holding cost is P
1.5 per unit per month and the ordering cost is P40 per order.

Literation 1

Start the solution process by placing an order for 36 units in January

Month Jan Feb Mar Apr May Jun

Demand
(kg) 32 19 12 15 23 12

Cost incurred for January

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of P40

Holding cost Assume that the ordered quantity will be received in full at the beginning of January.
Thus, the inventory level at the beginning of January would be units, and that at the end
of January would be 0. The average inventory level in January would, therefore, be

32+0
¿ 2
= 16 units

The holding cost for January would be P16 x P1.5 or P24

In this case, the holding cost (P24) is less than the order cost (P40). Therefore, the next step would be to
set the order horizon to 2 months – January and February – and place one order at the beginning of
January that would meet the requirements for both January and February.

Literation 1.2

The demand for January is 32 units, and that for February is 19 units. If an order of 51 units were placed
at the beginning of January, the following costs would be incurred.

Table 6. Costs incurred for January and February

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of P40

Holding cost Assuming the ordered quantity of 96 units would be received in full at the beginning of
January, the inventory level at the beginning of January is 96 units. The inventory level
at the end of January is 60 units. So, the average inventory level in January would be.

51+19
¿ 2
 = 35 units

The inventory level at the beginning of February would be 19 units, and at the end of
February would be 0.

So, the average inventory level in February would be

19+ 0
¿ 2

= 9.5 units

The total holding cost for the months of January and February would, therefore, be:

= (35 + 9.5) x P1.5= P 66.75

At this point, the holding cost (P66.75) has exceeded the cost of placing one order (P40). Calculated the
Cr values.

For literation 1.1, the holding cost for ordering 32 units in January is P24 Thus, Cr would be

Cr=[ P 40−P 24 ]=P16

For literation 1.2, the holding cost for ordering 51 units in January is P66. 75. Thus,

Cr=[ P 40−P 66.75]=P 26.75

If should be noted that in assessing Cr, it should be forced on computing the difference between holding cost, and
ordering cost: thus, the sign should be ignored.

Closeness factor for January – February order horizon

Parameters January January + February
Cr 16 26.75
Q 32 51

As seen from closeness factor Table of January- February, Cr for the lot size of 32 units is smaller for the two (2)
order horizons – January and January and February (or the total holding cost is closer to the ordering cost).
Therefore, conclude that it is economical to the place an order for 32 units in January, which will help meet the
demand for January alone.

Literation 2.1

Since the demand for February was not included in the previous lot size, start a new iteration after setting the
starting period to February. The demand for February is 19 units.

Month Jan Feb Mar Apr May Jun

Demand (kg) 32 19 12 15 23 12
Costs incurred for February

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of P40

Holding cost Assume that the ordered quantity will be received in full at the beginning of February.
Thus, the inventory level at the beginning of February would be 19 units, and that at the
end of February would be 0. The average inventory level in February would, therefore,
be

19+ 0
¿ 2
= 9.5 units

The holding cost for February would be P 9.5 x P 1.5 or P 14.25

The holding cost of P14.25 is less than the order cost of P40. Therefore, the next step is to set an order
horizon to two (2) months – February and March – and place an order at the beginning of February that
would meet the requirement for both these methods.

Literation 2.2

In this literation, set the order horizon to two (2) months – February and March, and place an order for
31 units at the beginning of February.
Month Jan Feb Mar Apr May Jun
Demand (kg) 32 19 12 15 23 12

Cost incurred for February and March

Type of cost Description

Ordering cost Since the order is placed, we incur ordering cost of P40

Holding cost Assuming the ordered quantity of 31 units is received in full at the beginning of
February, the beginning inventory level is 31 units. The inventory level at the end of
February is 12 units. Thus, the average inventory level in February would be:

31+12
¿ 2
= 21.5 units

The inventory level at the beginning of March would be 12 units, and at the end of
March would be 0. So, the average inventory level in March would, therefore, be

12+0
¿ 2
 = 6 units

The total holding cost for the months of February and March would, therefore, be

= (21.5 + 6) x P1.5 = P41.25

At this stage, the total holding cost of P41.25 has exceeded the order cost of P40. Thus, the Cr values
need to be checked.

For Iteration 2.1, the holding cost for ordering 19 units in February is P14.25. Thus, Cr would be

Cr=[ P 40−P 14.25]=P 25.75

For Iteration 2.2, the holding cost for ordering 31 units in February is P21.5. Thus, Cr would be

C r =[ P 40−P 21.5]=P 18.5

Closeness Factor for February- March order horizon

Parameters February February + March
Cr 25.75 18.5
Q 19 31
As seen from Closeness Factor Table of Feb-March, the Cr for February is close to that of the combined
February and March order horizon: therefore, it is economical to place an order for 19 units in February,
which will help meet the demand for February only.

Iteration 3.1

The demand for March was not included as part of the order placed in February. We, therefore, start a
new iteration after setting the initial period to March. The demand for March is 85 units.
Month Jan Feb Mar Apr May Jun
Demand (kg) 32 19 12 15 23 12

Cost incurred for March

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of P40

Holding cost Assume that the ordered quantity will be received in full at the beginning of March.
Thus, the inventory level at the beginning of March would be 12 units, and that at the
end of March would be 0. The average inventory level in March would, therefore, be

12+0
¿ 2
= 6 units
 The holding cost for March would be P6 xP1.5 or P9

The holding cost (P9) is less than the order cost (P40). Therefore, the next step is to step is to set an
order horizon to 2 months – March and April – and place one order at the beginning of March, which
would meet the requirements for both these months.

Iteration 3.2
Month Jan Feb Mar Apr May Jun
Demand (kg) 32 19 12 15 23 12

Table 12 Costs incurred for March and April

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of P40

Holding cost Since we receive the ordered quantity of 27 units in full at the beginning of March the
inventory level at the beginning of March is 27 units. The inventory level at the end of
March is 15 units. So, the average inventory level in March would be

27 +15
¿ 2
= 21 units

The inventory level at the beginning of April would be 15 units, and at the end of April
would be 0. So, the average inventory level in April would, therefore, be

15+ 0
¿ 2

=7.5 units

The total holding cost for the months of March and April would, therefore, be

= (21 + 7.5) x P1.5 = P42.75

Since the total holding cost has exceeded the order cost check the Cr values:

For Iteration 3.1 the holding cost for ordering 12 units in March is P9. Thus, Cr would be

Cr=[ P 40−P 9 ]=P 31

For Iteration 3.2, the holding cost for ordering 27 units in March is ₱42.75. Thus,

Closeness Factor for March- April order horizon

Parameters March March + April
Cr 31 2.75
Q 12 27

𝐶 = |₱40 − ₱42.75| = ₱2.75

As seen from above, the 𝐶 for the lot size of 27 units is smaller (meaning, the holding cost is closer to
the ordering cost); thus, it is economical to place an order for 27 units in March, which will help meet
the demand for March only.

Iteration 4.1

The demand for April was not included as part of the order placed in March. We, therefore, start a new
iteration after setting the initial period to April. The demand for April is 11 units
Month Jan Feb Mar Apr May Jun
Demand (kg) 32 19 12 15 23 12

Costs incurred for April

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Since we receive the ordered quantity in full at the beginning of April, the inventory level
at the beginning of April would be 15 units. The inventory level at the end of April
would be 0. The average inventory level in April would, therefore, be

15+ 0
¿ 2

= 7.5 𝑢𝑛𝑖𝑡

The holding cost for April would be 7.5 × ₱1.5 or ₱11.25

The holding cost (₱11.25) is less than the order cost (₱40). Therefore, the next step is to set an order
horizon to 2 months – April and May – and place one order at the beginning of April that would meet
the requirements for both these months.

As seen from above, the 𝐶 for the lot size of 15 units is smaller (meaning, the holding cost is closer to
the ordering cost); thus, it is economical to place an order for 15 units in March, which will help meet
the demand for March only.

Iteration 4.2
Month Jan Feb Mar Apr May Jun
Demand (kg) 32 19 12 15 23 12

Costs incurred for April and May

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Since we receive the ordered quantity of 38 units in full at the beginning of April, the
inventory level at the beginning of April is 38 units. The inventory level at the end of
April is 23 units. So, the average inventory level in April would be

38+ 23
¿ 2
= 30.5 𝑢𝑛𝑖𝑡

The inventory level at the beginning of May would be 23 units, and at the end of May
would be 0. So, the average inventory level in May would, therefore, be

23+ 0
¿ 2

= 11.5 𝑢𝑛𝑖𝑡

The total holding cost for the months of April and May would, therefore, be

= (30.5 + 11.5) × ₱1.5 = ₱63

Since the total holding cost has exceeded the order cost, check the 𝐶 values:

For Iteration 4.1, the holding cost for ordering 15 units in April is ₱11.25. Thus, 𝐶 would be

𝐶 = |₱40 − ₱11.25| = ₱28.75

For Iteration 4.2, the holding cost for ordering 38 units in April is ₱63. Thus,

𝐶 = |₱40 − ₱63| = ₱23

Closeness Factor for April – May order horizon

Parameters April April + May
Cr 28.75 23
Q 15 38

As seen from above, since the 𝐶 for the lot size of 38 units is smaller (meaning, the holding cost is
closer to the ordering cost), it is, therefore, economical to place an order for 38 units in April, which will
help meet the demand for April and May.
Month Jan Feb Mar Apr May Jun
Demand (kg) 32 19 12 15 23 12

Costs incurred for May

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.
Holding cost Assume that the ordered quantity will be received in full at the beginning of May. Thus,
the inventory level at the beginning of May would be 23 units, and that at the end of
May would be 0. The average inventory level in May would, therefore, be

23+ 0
¿ 2

= 11.5𝑢𝑛𝑖𝑡

The holding cost for May would be 11.5 × ₱1.5 or ₱17

Month Jan Feb Mar Apr May Jun

Demand (kg) 32 19 12 15 23 12

Costs incurred for May and June

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Since we receive the ordered quantity of 35 units in full at the beginning of April, the
inventory level at the beginning of April is 35 units. The inventory level at the end of
April is 12 units. So, the average inventory level in April would be

35+12
¿ 2
= 23.5 𝑢𝑛𝑖𝑡

The inventory level at the beginning of May would be 23 units, and at the end of May
would be 0. So, the average inventory level in May would, therefore, be

12+0
¿ 2
= 6 𝑢𝑛𝑖𝑡

The total holding cost for the months of April and May would, therefore, be

= (23.5 + 6) × ₱1.5 = ₱44.25

Since the total holding cost has exceeded the order cost, check the 𝐶 values:

For Iteration 4.1, the holding cost for ordering 23 units in April is ₱17.25. Thus, 𝐶 would be

𝐶 = |₱40 − ₱17.25| = ₱22.75

For Iteration 4.2, the holding cost for ordering 35 units in April is ₱44.25. Thus,

𝐶 = |₱40 − ₱44.25| = ₱4.25

 Closeness Factor for May – June order horizon
Parameters May May + June
Cr 22.75 4.25
Q 23 35

Iteration 5.1

Start a new iteration after setting the starting period to June

Month Jan Feb Mar Apr May Jun
Demand (kg) 32 19 12 15 23 12

Costs incurred for June

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Since we receive the ordered quantity of 12 units in full at the beginning of
June, the inventory level at the beginning of June would be 12 units. The
inventory level at the end of June would 0 units. So, the average inventory level
in June would be

12+0
¿ 2
= 6 𝑢𝑛𝑖𝑡

The holding cost for June would be 6 × ₱1.5 or ₱9

Total inventory cost the total inventory cost is ₱40 + ₱9 = ₱49

Solution Summary

Month Order quantity Ordering cost Holding cost Inventory cost

January 32 P40 P24 P64
February 31 P40 P41.25 P81.25
March
April 38 P40 P63 P103
May
June 12 P40 P9 P49
TC 113 P160 P137.25 P297.25
3. The monthly demand for an item over six (6) months is 32, 19, 12, 15, 23, and 12 units respectively.
Using the Silver-Meal method. Determine the total inventory cost if the holding cost is P1.5 per unit
per month and the ordering cost is P40 per order.

𝑂𝐶 ₱40 per order

₱1.5 per unit per period

Iteration 1.1
Month Jan Feb Mar Apr May Jun
Demand (kg) 32 19 12 15 23 12

Costs incurred for January

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Assume that the ordered quantity will be received in full at the beginning of
January. Thus, the inventory level at the beginning of January would be 32 units,
and that at the end of January would be 0. The average inventory level in
January would, therefore, be

32+0
¿ 2
= 16 𝑢𝑛𝑖𝑡

The holding cost for January would be 16 × ₱1.5 or ₱24

Total inventory cost The total inventory cost is ₱40 + ₱24 = ₱64

Per Period Cost (PPC) Since this cost is incurred over one period (January), the PPC is

P 64
¿ 1

= ₱64

Iteration 1.2
 The next step would be to set an order horizon to 2 months – January and February – and place one
order at the beginning of January that would meet the requirements for both these months.
Month Jan Feb Mar Apr May Jun
Demand (kg) 32 19 12 15 23 12

Costs incurred for January and

February Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Assuming the ordered quantity of 96 units would be received in full at
the beginning of January, the inventory level at the beginning of January
is 51 units. The inventory level at the end of January is 19 units. So, the
average inventory level in January would be

51+19
¿ 2
= 35 𝑢𝑛𝑖𝑡

The inventory level at the beginning of February would be 19 units, and

at the end of February would be 0. So, the average inventory level in
February would be

19+ 0
¿ 2

= 9.5 𝑢𝑛𝑖𝑡

The total holding cost for the months of January and February would,
therefore, be:

= (35+9.5) x ₱ 1.5 = ₱ 66.75

Total inventory cost ₱ 40 + ₱66.75 = ₱ 106.75

Per Period Cost (PPC) Since this cost is incurred over two (2) periods (January and February),
the PPC is

P 106.75
¿ 2
= ₱ 53. 38

Since the PUC for the order horizon of January and Feb took together is less than the PUC for the order
horizon for January alone, continue this iteration by combining the demand for January, February and
March, in one order, placed at the beginning of January. The total demand for January, February and
March is 63 units.
Iteration 2.1

Set the order horizon to February since the demand for this month was not included in the previous
order
Month Jan Feb Mar Apr May Jun
Demand (kg) 32 19 12 15 23 12

Cost incurred for January, February, and March

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Since we receive the ordered quantity of 63 units in full at the beginning of
January, the inventory level at the beginning of March is 63 units. The inventory
level at the end of March is 31 units. So, the average inventory level in March
would be

63+ 31
¿ 2
= 47 𝑢𝑛𝑖𝑡

The inventory level at the beginning of February would be 31 units, and at the
end of April is 12 units. So, the average inventory level in April would be: So, the
average inventory level in March would, therefore, be

31+12
¿ 2
= 21.5 units

The inventory level at the beginning of Mar would be 23 units, and at the end of
March would be 0.

So, the average inventory level in March would, therefore, be

12+0
¿ 2
= 6 units

The total holding cost for the months of March and April would, therefore, be

= (47 + 21.5+ 6) x ₱1.5 = ₱ 111.75

Total inventory cost is 40+ 111.75= 151.75

 Per 151.75
unit cost is ¿
3
=50.58 units

Month Jan Feb Mar Apr May Jun

Demand (kg) 32 19 12 15 23 12

Costs incurred for April

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Assuming the ordered quantity of 15 units will be received in full at the
beginning of March, the inventory level at the beginning of March is 15 units.
The inventory level at the end of March is 0 units. Thus:

15+ 0
¿ 2

= 7.5𝑢𝑛𝑖𝑡

The total holding cost for March would, therefore, be:

= 7.5 × ₱1.5 = ₱11.25

Total inventory cost The total inventory cost is ₱40 + ₱11.25 = ₱51.25

Per Unit Cost (PUC) The total demand is 12 units. The Per Unit Cost (PC) is

P 51.25
¿ 1
= ₱51.25unit

Month Jan Feb Mar Apr May Jun

Demand (kg) 32 19 12 15 23 12

Costs incurred for April and May

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱80
Holding cost Assuming the ordered quantity of 38 units will be received in full at the
beginning of April, the inventory level at the beginning of April is 38 units. The
inventory level at the end of May is 23 units. Thus:

38+ 23
¿ 2
= 30.5 𝑢𝑛𝑖𝑡

The inventory level at the beginning of May would be 23 units, and at the end of
May would be 0. So, the average inventory level in May would, therefore, be

23+ 0
¿ 2

= 11.5 𝑢𝑛𝑖𝑡

The total holding cost for the months of March and April would, therefore, be:

= (30.5 + 11.5) × ₱1.5 = ₱63

Total inventory cost The total inventory cost is ₱40 + ₱63 = ₱103

Per Unit Cost (PUC) Since this cost is incurred over two periods (March and April), the Per Unit Cost
(PC) is

P 103
¿ 2
= ₱51.5

Month Jan Feb Mar Apr May Jun

Demand (kg) 32 19 12 15 23 12

Costs incurred for May

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Assuming the ordered quantity of 23 units will be received in full at the
beginning of May the inventory level at the beginning of March is 23 units. The
inventory level at the end of March is 0 units. Thus:

23+ 0
¿ 2
= 11.5 𝑢𝑛𝑖𝑡
 The total holding cost for March would, therefore, be:

= 11.5 × ₱1.5 = ₱17.25

Total inventory cost The total inventory cost is ₱40 + ₱17.25 = ₱57.25

Per Unit Cost (PUC) The total demand is 23units. The Per Unit Cost (PC) is

P 57.25
¿ 1
= ₱57.25

Month Jan Feb Mar Apr May Jun

Demand (kg) 32 19 12 15 23 12

Costs incurred for May and June

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Assuming the ordered quantity of 35 units will be received in full at the
beginning of March, the inventory level at the beginning of March is 35 units.
The inventory level at the end of March is 112 units. Thus:

35+12
¿ 2
= 23.5 𝑢𝑛𝑖𝑡

The inventory level at the beginning of June would be 12 units, and at the end of
June would be 0. So, the average inventory level in June would, therefore, be

12+0
¿ 2
= 6 𝑢𝑛𝑖𝑡

The total holding cost for the months of March and April would, therefore, be:

= (23.5 + 6) × ₱1.5 = ₱44.25

Total inventory cost The total inventory cost is ₱40 + ₱44.25 = ₱84.25

Per Unit Cost (PUC) Since this cost is incurred over two periods (March and April), the Per Unit Cost
(PC) is

P 84.25
¿ 2
 = ₱42. 13

Month Jan Feb Mar Apr May Jun

Demand (kg) 32 19 12 15 23 12

Costs incurred for June

Type of cost Description

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Since we receive the ordered quantity of 12 units in full at the beginning of
June, the inventory level at the beginning of June would be 12 units, and at the
end of June, would be 0. So, the average inventory level in March would,
therefore, be

12+0
¿ 2
= 6 𝑢𝑛𝑖𝑡

The holding cost for April would be 6 × ₱1.5 or

₱9 Total inventory cost The total inventory cost is ₱40 + ₱9 = ₱49

Per Period Cost (PPC) the PPC is,

P 49
¿ 1

= ₱ 49

Solution Summary

Month Order quantity Ordering cost Holding cost Inventory cost

January 63 P40 P111.75 P151.75
February
March
April 15 P40 P63 P51.25
May 35 P40 P44.25 P 84.25
June
TC 113 P120 P219 P287.25
4. The monthly demand for an item over six (6) months is 32, 19, 12, 15, 23, and 12, units respectively.
Using the least unit cost method. Determine the total inventory cost if the holding cost is P 1.5 per
unit per month and the ordering cost is P 40 per order.

Cost Incurred for January

Jan Feb Mar Apr May Jun
32 19 12 15 23 12

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Assume that the ordered quantity will be received in full at the beginning of January.
Thus, the inventory level at the beginning of January would be 32 units, and that at the
end of January would be 0. The average inventory level in January would, therefore, be

32+0
¿ 2

=₱16 units

The holding cost for January would be 16 × ₱1.5 or ₱24.00

The total inventory cost is ₱40 + ₱24 = ₱64

The total demand for this period is 36 units.

The Per Unit Cost (PC) is

64
¿ 32

=₱2 units

Jan Feb Mar Apr May Jun

32 19 12 15 23 12

The next step would be to set an order horizon to two (2) months – January and February – and place
one order at the beginning of January that would meet the requirements for both these months
Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Assuming the ordered quantity of 51 units would be received in full at the beginning of
January, the inventory level at the beginning of January is 51 units. The inventory level
at the end of January is 19 units. So, the average inventory level in January would be

51+19
¿ 2
=₱35 units

The inventory level at the beginning of February would be 19 units, and at the end of
February would be 0. So, the average inventory level in February would be

19+ 0
¿ 2

=₱9.5 units

The total holding cost for the months of January and February would, therefore, be:

= (35 + 9.5) × ₱1.5 = ₱66.75

The total inventory cost is ₱40 + ₱66.75 = ₱106.75

The Per Unit Cost (PC) is

106.75
¿ 51
=₱2.09 units

Cost Incurred for February

Jan Feb Mar Apr May Jun
32 19 12 15 23 12

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Assume that the ordered quantity will be received in full at the beginning of
February. Thus, the inventory level at the beginning of February would be 32
units, and that at the end of February would be 0. The average inventory level in
February would, therefore, be

19+ 0
¿ 2

=₱9.5 units

The holding cost for January would be 9.5× ₱1.5 or ₱14.25

The total inventory cost is ₱40 + ₱214.25 = ₱54.25

 The total demand for this period is 19 units.

The Per Unit Cost (PC) is

54.25
¿ 19

=₱2.86 units

Cost Incurred for February and March

Jan Feb Mar Apr May Jun
32 19 12 15 23 12

Ordering cost Since the order is placed, we incur an ordering cost of ₱40

Holding cost Assuming the ordered quantity of 31 units would be received in full at the beginning of
February, the inventory level at the beginning of February is 31 units. The inventory
level at the end of February is 12units. So, the average inventory level in February would
be

31+12
¿ 2
=₱21.5 units

The inventory level at the beginning of February would be 19 units, and at the end of
February would be 0. So, the average inventory level in February would be

12+0
¿ 2
=₱6 units

The total holding cost for the months of January and February would, therefore, be:

= (21.5 + 6) × ₱1.5 = ₱41.25

The total inventory cost is ₱40 + ₱41.25 = ₱81.25

The Per Unit Cost (PC) is

81.25
¿ 31

=₱2.62 units

The PUC for order horizon January-February-March is greater than the PUC for the two-
period order horizon of January-February. Therefore, the optimal order quantity is the
sum of the order quantities for January and February, which is 51 units

Cost Incurred for April

 Jan Feb Mar Apr May Jun
32 19 12 15 23 12

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Assuming the ordered quantity of 15 units will be received in full at the beginning of
April, the inventory level at the beginning of April is 15 units. The inventory level at the
end of April is 0 units. Thus

15+ 0
¿ 2

=₱7.5 units

The total holding cost for March would, therefore, be:

= 7.5 × ₱1.5 = ₱11.25

The total inventory cost is ₱40 + ₱11.25= ₱51.25

The total demand is 15 units.

The Per Unit Cost (PC) is

51.25
¿ 15

=₱3.42 units

Cost Incurred for April

Jan Feb Mar Apr May Jun
32 19 12 15 23 12

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Assuming the ordered quantity of 38 units would be received in full at the beginning of
April, the inventory level at the beginning of April is 38 units. The inventory level at the
end of April is 23units. So, the average inventory level in February would be

38+ 23
¿ 2
=₱49.5 units

The inventory level at the beginning of February would be 23 units, and at the end of
February would be 0. So, the average inventory level in February would be

23+ 0
¿ 2
 =₱11.5 units

The total holding cost for the months of January and February would, therefore, be: =
(49.5 + 11.5) × ₱1.5 = ₱91.5

The total inventory cost is ₱40 + ₱91.5 = ₱131.5

The Per Unit Cost (PC) is

131.5
¿ 38

=₱3.46 units

Cost Incurred for May

Jan Feb Mar Apr May Jun
32 19 12 15 23 12

Ordering cost Since the order is placed, we incur an ordering cost of ₱40.

Holding cost Assume that the ordered quantity will be received in full at the beginning of January.
Thus, the inventory level at the beginning of January would be 32 units, and that at the
end of January would be 0. The average inventory level in January would, therefore, be

23+ 0
¿ 2

=₱11.5 units

The holding cost for January would be 11.5 × ₱1.5 or ₱17.25

The total inventory cost is ₱40 + ₱17.25 = ₱57.25

The total demand for this period is 23 units.

The Per Unit Cost (PC) is

57.25
¿ 23

=₱2.49 units
Cost Incurred for May
Jan Feb Mar Apr May Jun
32 19 12 15 23 12

Ordering cost Since the order is placed, we incur an ordering cost of ₱40

Holding cost Assuming the ordered quantity of 35 units will be received in full at the
beginning of May, the inventory level at the beginning of May is 35 units. The
inventory level at the end of May is 12 units. Thus

35+12
¿ 2
=₱23.5 units

The inventory level at the beginning of June would be 12 units, and at the end of
June would be 0. So, the average inventory level in June would, therefore, be

12+0
¿ 2
=₱6units

The total holding cost for the months of March and April would, therefore, be:

= (23.5 + 6) × ₱1.5 = ₱44.25

The total inventory cost is ₱40 + ₱44.25 = ₱84.25

Since this cost is incurred over two periods (May and June),

The Per Unit Cost (PC) is =

84.2
¿ 5
25
=₱ 2.41 units

Solution Summary

Month Order quantity Ordering cost Holding cost Inventory cost

January 32 P40 P24 P64
February 31 P40 P41.25 P81.25
March
April 15 P40 P11.25 P51.25
May 35 P40 P44.25 P 84.25
June
TC 113 P160 P120.75 P280.25