Sheet Ch12 Discussion Questions and Problems 2022-2023

Solutions

Discussion Questions 1, 4, 7, 11, and 15

1. The four types of inventory are:
◼ Raw material—items that are to be converted into product
◼ Work-in-process (WIP)—items that are in the process of being converted
◼ Finished goods—completed items for which title has not been transferred
◼ MRO—(maintenance, repair, and operating supplies)—items that are necessary to keep the transformation process going

4. Types of costs—holding cost: the cost of capital invested and space required; shortage cost: the cost of lost sales or customers
who never return; the cost of lost goodwill; ordering cost: the costs associated with ordering, transporting, and receiving the items;
unit cost: the actual cost of the item.

11. Service level refers to the probability that demand will not be greater than supply during lead time. It is the complement of the
probability of a stockout.

15. Safety stock is inventory beyond average demand during lead time, held to control the level of shortages when demand and/or
lead time are not constant; inventory carried to ensure that the desired service level is reached.
2 CHAPTER 12 INVENTORY MANAGEMENT

Problems 2, 6, 12, 14, 17, 20, 28, 30, 40, 42, 45, 46, 47, 48, 51, and 53
12.2 (a) You decide that the top 20% of the 10 items, based on a criterion of demand times cost per unit, should be A items. (In this
example, the top 20% constitutes only 64.4% of the total inventory value, but in larger samples the value would probably approach
70% to 80%.) You therefore rate items F3 and G2 as A items. The next 30% of the items are A2, C7, and D1; they represent 25.5%
of the value and are categorized as B items. The remaining 50% of the items (items B8, E9, H2, I5, and J8) represent 10.1% of the
value and become C items.
Annual
Item Demand Cost ($) Demand  Cost Classification
A2 3,000 50 150,000 B
B8 4,000 12 48,000 C
C7 1,500 45 67,500 B
D1 6,000 10 60,000 B
E9 1,000 20 20,000 C
F3 500 500 250,000 A
G2 300 1,500 450,000 A
H2 600 20 12,000 C
I5 1,750 10 17,500 C
J8 2,500 5 12,500 C
(b) Borecki can use this information to manage his A and B items more closely and to save ordering costs on his less important C
items by ordering only when A or B items are being ordered from the same supplier.
(c) A2 could easily move to the A category based on annual dollar volume. In a small sample, 30% of the items can be placed in the
A category if deemed appropriate.

12.6
Annual Demand 
Item Demand Cost ($) Cost Classification
E102 800 4.00 3,200 C
D23 1,200 8.00 9,600 A 27%
D27 700 3.00 2,100 C
R02 1,000 2.00 2,000 C
R19 200 8.00 1,600 C
S107 500 6.00 3,000 C
S123 1,200 1.00 1,200 C
U11 800 7.00 5,600 B 16%
U23 1,500 1.00 1,500 C 33%
V75 1,500 4.00 6,000 B 17%

12.12 (a) Reorder point = Demand during lead time

ROP = [Demand/Day](Lead time) = 100 units/day  21 days = 2,100 units
(b) If demand during lead time doubles to 200 units/day,
ROP = 200 units/day × 21 days = 4,200 units.
(c) If demand during lead time drops to 50 units/day,
ROP = 50 units/day × 21 days = 1,050 units.

2 DS 2(6,000)(30)
12.14 (a) EOQ = = = 189.74 units
H 10
(b) Average inventory = 94.87
(c) Optimal number of orders/year = 31.62
250
(d) Optimal days between orders = = 7.91
31.62
(e) Cost of inventory management, excluding cost of goods = (31.62  30) + (94.87  10) = $1,897.30
(f) Total annual inventory cost = $601,897.30 (including the $600,000 cost of goods)
Note: Rounding occurs in answers.
 CHAPTER 12 INVENTORY MANAGEMENT 3

12.17 (a) The EOQ assumptions are met, so the optimal order quantity is:
2 DS 2(250)20
EOQ = = = 100 units
H 1

(b) Number of orders per year = D/Q = 250/100 = 2.5 orders per year.
Note that this would mean in one year the company places 3 orders and in the next it would only need 2 orders since
some inventory would be carried over from the previous year. It averages 2.5 orders per year.
(c) Average inventory = Q/2 = 100/2 = 50 units
(d) Given an annual demand of 250, a carrying cost of $1, and an order quantity of 150, Patterson Electronics must
determine what the ordering (setup) cost would have to be for the order policy of 150 units to be optimal. To find the
answer to this problem, we must solve the traditional economic order quantity equation for the ordering (setup) cost. As
you can see in the calculations that follow, an ordering (setup) cost of $45 is needed for the order quantity of 150 units to
be optimal.
2 DS
Q=
H
H
S = Q2
2D
(150)2 (1)
=
2(250)
22,500
= = $45
500

12.20 (a) Production Order Quantity, non-instantaneous delivery:

2 DS 2  10,000  40
Q= =
 d  50 
H 1 −  0.60  1 − 
 p   500 
= 1217.2, or 1,217 units
where D = annual demand, S = setup cost, H = holding cost, d = daily demand rate, p = daily production rate
 d
(b) Inventory max = Q  1 −  =1,095
 p

(c)
D = 10,000 = 8.22
Q 1,217
Inventory max
(d) TC = H + DS
2 Q
= 328.50 + 328.80 = $657.30
12.28 Calculation for EOQ: S = $50, I = 50%, H = 50% of P, D = 9,600
(a) Price EOQ Vendor
$17.00 336.0672 feasible 1
$16.75 338.5659 not feasible, so must be adjusted up to 500
$16.50 341.1211 not feasible, so must be adjusted up to 1,000
$17.10 335.0831 feasible 2
$16.85 337.5598 not feasible, so must be adjusted up to 400
$16.60 340.0921 not feasible, so must be adjusted up to 800
$16.25 343.74 not feasible, so must be adjusted up to 1,200

(b, c) Costs
Qty Price Holding Ordering Purchase Total
336 $17.00 $1,428.00 $1,428.57 $163,200.00 $166,056.57 Vendor 1
500 $16.75 $2,093.75 $960.00 $160,800.00 $163,853.75
1000 $16.50 $4,125.00 $480.00 $158,400.00 $163,005.00
335 $17.10 $1,432.13 $1,432.84 $164,160.00 $167,024.97 Vendor 2
400 $16.85 $1,685.00 $1,200.00 $161,760.00 $164,645.00
800 $16.60 $3,320.00 $600.00 $159,360.00 $163,280.00
1200 $16.25 $4,875.00 $400.00 $156,000.00 $161,275.00 BEST
4 CHAPTER 12 INVENTORY MANAGEMENT

(d) Other considerations include the perishability of the chemical and whether there is adequate space in the controlled
environment to handle 1,200 pounds of the chemical at one time.
12.30 Annual demand, D = 8,000
Daily production rate, p = 200
Setup cost, S = 120
Holding cost, H = 50
Production quantity, Q = 400
(a) Daily demand, d = D/250 = 8,000/250 = 32
(b) Number of days in production run = Q/p = 400/200 = 2
(c) Number of production runs per year = D/Q = 8,000/400 = 20
Annual setup cost = 20($120) = $2,400
(d) Maximum inventory level = Q(1 – d/p)
= 400(1 – 32/200) = 336
Average inventory = Maximum/2 = 336/2 = 168
(e) Total holding cost + Total setup cost = (168)50 + 20(120)
= $8,400 + $2,400
= $10,800

2 DS 2(8,000)120
(f) Q = = = 213.81
 d  32 
H 1 −  50  1 − 200 
 p  

Total holding cost + Total setup cost = 4,490 + 4,490 = $8,980

Savings = $10,800 – $8,980 = $1,820

12.40 Step 1, under the lowest possible price of $17.25:

2(100)(45)
*
Q$17.25 = = 51.1  51 units
(0.20)(17.25)

Because 51 > 50, this EOQ is feasible for the $17.25 price. And because $17.25 is the lowest possible purchase price, this quantity, 51,
must be the optimal solution.
Using (12-9), the total cost can be computed as:
100 51
TC51 = ($45) + (0.20)($17.25) + $17.25(100)
51 2
= $88.24 + $87.98 + $1,725.00 = $1,901.22

Note: Order and carrying costs are not equal due to rounding of the EOQ to a whole number.

12.42 (a) Z = 1.88

(b) Safety stock = Z = 1.88(5) = 9.4 drives
(c) ROP = 50 + 9.4 = 59.4 drives

12.45
Safety Additional Total
Stock Carrying Cost Stockout Cost Cost
0 0 10  0.2  50  7 + 20  0.2  50  7 + 30  0.1  50  7 = 3,150 3,150
10 10  5 = 50 50  7(10  0.2 + 20  0.1) = 1,400 1,450
20 20  5 = 100 10  0.1  50  7 = 350 450
30 30  5 = 150 0 150

The BB-1 set should therefore have a safety stock of 30 units; ROP = 90 units.
 CHAPTER 12 INVENTORY MANAGEMENT 5

12.46 Only demand is variable in this problem, so Equation (12-15) applies.

(a) Safety stock = 291 towels

(b) ROP = (Average daily demand  Lead time in days) + Z dLT

= (1,000  2) + (2.055)( d ) ( Lead time )

= 2,000 + 2.055(100) 2
= 2,000 + 291 = 2,291 towels

12.47 Only lead time is variable in this problem, so Equation (12-16) is used.
Z = 1.88 for 97% service level
ROP = (Daily demand  Average lead time in days) + Z  Daily demand  LT
ROP = (12,500  4) + (1.88)(12,500)(1)
= 50,000 + 23,500 = 73,500 pages

12.48 (a) Both lead time and demand are variables, so Equation (12-17) applies, in weeks. Z = 1.28 for 90% service.
ROP = (200  6) + 1.28 dLT

where  dLT = (6  252 ) + (2002  22 )

= (6  625) + (40,000  4) = 3,750 + 160,000

= 163,750  405
So ROP = 1,200 + (1.28) (405)  1,200 + 518 = 1,718 cigars

(b) For 95% service level, Z = 1.65

So ROP = (200 × 6) + 1.65(405)  1,200 + 668 = 1,868 cigars.
(c) A higher service level means a lower probability of stocking out. Hence, the ROP increases from 1,718 to 1,868 when the service
level change from part (a) to part (b).

12.51 Cs = $9 – $5 = $4
Co = $5 – $2 = $3
Cs 4 4
Service level = = = = 0.5714
Cs + Co 4 + 3 7
Z  .18,  = 100,  = 15
Optimal stocking level = 100 + .18(15) = 102.7, or 103 pounds of oysters.

12.53  = ( 2 3 ) (90,000) = 60,000 programs,  = 5,000

(a) Cs = $4 − $1 = $3 = cost of underestimating program demand
(b ) Co = $1 − $.10 = $.90 = cost of overage
Cs 3 3
(c) Service level = = = = .7692
Cs + Co 3 + .90 3.90
So Z  .735 (about halfway in Appendix I between .73 and .74)
Optimal number of programs to order per game
= 60,000 + .735 (5,000) = 60,000 + 3,675
= 63,675
(d) Stockout risk = 1 – Service level = 1 – .7692 = .2308, or 23.1%