EXTRA PROBLEMS WITH SOLUTIONS

Example 10:
The ABC Co. is planning to stock a new product. The Co. Has developed the
following information:
Annual usage = 5400 units
Cost of the product = 365 /unit
Ordering cost = 55 /order
Carrying cost = 28% /year of inventory value held.
a Determine the optimal number of units per order
b. Find the optimal number of orde$/year
c. Find the annual total inventory cost
Solution:
a. X0 = 2CB/zp = 2*5400*55/365*0.28 = ~76 units/order
b. N0 = C/X0 =5400 / 76 = ~71 orde$/year
c. Ke= 2CBzp = 2*5400*55*365*0.28 = 7791.46 /year.
Example 11:
Holding costs are 35 $/unit/year. The ordering cost is 120 $/order and sales are
relatively constant at 400 month.
a. What is the optimal order quantity?
b. What is the annual total inventory cost?
Solution:
a. X0 = 2CB/E= 2*(400*12)*120/35 = 181.42 units/order
b. Ke= 2CBE= 2*(400*12)*120*35 = 6349.80 $/year

Example 12:
Azim furniture company handles several lines of furniture, one of which is the
popular Layback Model TT chair. The manager, Mr. Farme$on, has decided to determine
by use of the EOQ model the best quantity to obtain in each order. Mr. Farme$on has
determined from past invoices that he has sold about 200 chair during each of the past
five yea$ at a fairly uniform rate and he expects to continue at that rate. He has estimated
that preparation of an order and other variable costs associated with each order are about
10 $, and it costs him about 1.5 % per month (or 18% per year) to hold items in stock.
His cost for the chair is 87 $.
a. How many layback chai$ should be ordered each time?
b. How many orde$ would there be?
c. Determine the approximate lenght of a supply order in days?
d. Calculate the mini$m total inventory cost
e. Show and verify that the annual holding cost is equal to the annual ordering cost
(due to rounding, show these costs are approximately equal)
Solution:
a. X0 = 2CB/Zp = 2*200*10 /0.18*87 = 15.98 =~16 chai$/order
b. N0 = C/X0 =200 /16= 12.5 orde$/year
c. t0 = X0/C * 365 = 16 /200 *365 = 29.2 days
d. Ke= 2CBZp = 2*200*10*0.18*87 = 250.28 $/year
e. N0 *B = 12.5 * 10 = 125 $
X0/2*Zp = 15.98/2 * 0.18*87 = 125.1 $
Example 13:
A. Leyla Tas has determined that the annual demand for #6 screws is 100000
screws. Leyla, estimates that it costs 10 $ every time when an order is placed. This cost
includes wages, the cost of the forms used in placing the order and so on. Furthermore,
she estimates that the cost of carrying are screw in inventory for a year is one-half of 0.01
$. Assume that the demand is constant throughout the year.

a. How many #6 screws should Leyla order at a time to minimize total inventory
cost?
b. How many orde$ per year would be placed? What would the annual ordering cost
be?
c. What would the average inventory be? What would the annual holding cost be?
Solution:
a. E= 0.01/2 = 0.005
X0 = 2CB/E
X0 = 2*100000*10 / 0.005 = 20000 screws/order
b. N0 = C/X0 = 100000/20000= 5 orde$/year
Total ordering cost = N*B = 5*10 = 50 $/year
c. Average inventory = x/2 = 20000/2 = 10000 units
Total holding cost = x/2*E= 10000 * 0.005 = 50 $/year
B. It takes approximately 8 working days for an order of #6 screws to arrive once
the order has been placed. The demand is fairly constant, and on the average the store
sells 500 screws each day. What is the ROP?
Solution:
ROP = Ro= use rate * lead time = c*tlt = 500 screws/day * 8 days = 4 000 screws.
C. The manager believes that Leyla places too many orde$ for screws /year. He
believes that an order should be placed only twice/year. If Leyla follows her manager`s
policy, how $ch more would this cost every year over the ordering policy that she
developed, if only two orde$ were placed each year, what effect would this have on the
ROP?
Solution:
Twice a year = Ke= NB + X/2*E = 2*10 + 50000/2*0.005 = 20 + 125 = 145
5 times a year = Ke= 2CBE = 2*100000*10*0.005 = 100 $
Extra cost for managers offer = 45 $
No effect on ROP.

Example 14:
Ahmet Uslu experiences an annual demand of 220 000 $ for pro quality tennis
balls at the zmir Tennis Supply Company. It cost Ahmet 30 $ to place an order and his
carrying cost is 18%. How many orde$ per year should Ahmet place for the balls?
Solution:
N0

CpZ

2B

220 000 0.18

2 30

25.69orders/year

Example 15:
Aye alkan,owner of Computer Village, needs to determine an optimal
ordering policy for Porto-Pro compute$,annual demand for the compute$ is 28 000 $ and
carrying cost is 23 percent. Aye has estimated order costs to be 48 $ per order. What are
the optimal $ per order?
Solution:
X0

2CpB

2 28 000 48
3418.62 mu/order
0.23

Example 16:
E$ uses 96 000 $ annually of a particular reagent in the chemistry department of
the E$ estimates the ordering cost at 45 $ and thinks that the unive$ity can hold this type
of inventory at an annual storage cost of 22% of the purchase price. How many months
supply should the purchasing department order at on time to minimize total annual cost of
inventory?
Solution:
t 0 12

2B
12
CpZ

2 45
0.784 month' ssupply
96 000 0.22

Example 17:
The ABC co.is planning to stock new product. The ABC co.has developed the
following information:
Annual usage = 5400 units
Cost of the product = 365 $/unit
Ordering cost = 55 $/order
Carrying cost = 28%/year of inventory value held
a) Determine the optimal number of units per order?
b) Find the optimal number of orde$/year?
c) Find the annual total inventory cost?
Solution:
a) X 0

b) N o

2CB

Zp

2 5400 55
76 units/order
365 0.28

C
5400

71 orders/year
X0
76

c) K e

2CBZp

2 5 400 55 365 0.28

60 706 800 7 791.46mu/year

Example 18:
A local artisan uses supplies purchased from an ove$eas supplier. The owner
believes the assumptions of the EOQ model are met reasonably well. Minimization of
inventory cost is her objective. Relevant data, from the files of the credit firm, are annual
demand (C) = 240 units, ordering cost (B) = 42 $/order, and holding cost = 4 $/unit/year.
a) How many should she order at one time?
b) How many times per year will she replenish its inventory of this material?
c) What will be the total inventory costs associated with this material?
d) If she discovered that the carrying cost has been ove$tated, and was in reality only
1 $/unit-year, what is the corrected value of EOQ?

Solution:
C 240 units/year
B 42 MU/order
E 4MU/unit/year

a) X o
b) N 0

2CB

2 240 42
70.99 71 Units/order
4

C
240

3.38 Times/year
X0
71

c) K e 2CBE 2 240 42 4 283.97 MU/year

d) X 0
Ke

2CB

E
2CBE

2 240 42
141.99 142 Units
1
2 240 42 1 142 MU/yr.

Example 19:
Ground Coffee shop uses 3 kgs of a specialty tea weekly; each kg. costs 16 $.
Carrying costs are 2 $/kg/week because space is very scarce. It costs the firm 7 $ to
prepare an order. Assume the basic EOQ model with no shortages applies. Assume 52
weeks/year.
a) How many kgs should Ground to order at a time?
b) What is total annual inventory cost?
c) How many orde$ should ground place annually?
d) How many days will there be between orde$(assume 310 operating days)?
Solution:
a) X 0
b) K e

2CB
2 3 7

4.58 kgs/order
E
2
2CBE 2 3 7 2 9.165 MU/week

K e 9.165 52 476.59 MU/year

C
3 52

34.06 Times/year
X0
4.58
1
1
310 9.1 9 days
d) t 310
N
34.06

c) N 0

Example 20:
Holding costs are 35 $/unit/year. The ordering cost is 120 $/order, and sales are
reletively constant at 400/month.

a) What is the optimal order quantity?

b) What is the annual total inventory cost?
Solution:
X0

2CB

Ke

2CBE

2 400 12 120
181.42 Units/order
35
2 400 12 120 35 6 349.80 MU/year

Example 21:
ABC, a company that sells pump housings to other manufacture$, would like to
reduce its inventory cost by determining the optimal number of pump housings to obtain
per order. The annual demand is 1 000 units, the ordering cost is 10 $/order, and the
average carrying cost per unit per year is 0.50 $. Calculate EOQ .(i.e.the optimal number
of units per order).
Solution:
21 00010
2CB

40 000 200units
E
0.50
C
X
1 000
200
Ke
B
E
10
0.5 100 MU
X
2
200
2
C 1000
N0

5times / yr
Q
200
Q
200
T

0.20 yr 73days
C 1000
X0

Example 22:
Lemar Supermarket sells about 200 000 kilos of milk annually. The milk is
purchased for 4 $/kg. Holding costs are 1.40 $/kg/yr. Each order costs 35 $. If the shelf
life of the milk is only 5 days, how many kilos should be ordered at a time.
Solution:

C 200 000kg/yr
P 4 MU/kg
E 1.40 MU/kg/yr
B 35 MU/order
Shelf Life 5 days
2 200 000 35
3 162.28 kilos
1.40
X
3 162.28
t 0 0 365
365 5.77 days
C
200 000

EOQ

2CB

With an EOQ of 3 162.28 kilos an order $st be placed every 5.77 days. But the
shelf

life

is

days

so

some

milk

will

start

to

go

sour.

Therefore

200 000
5 2 739.73 kilos should be ordered every 5 days.
365

Example 23:
A building materials stockist obtains its cement from a single supplier. Demand
for cement is reasonably constant throughout the year. Last year the company sold 2 000
tonnes of cement. It estimates the costs of placing an order at around 25 $ each time
an order is placed and charges inventory holding at 20% of purchase cost. The company
purchases cement at 60 $ per tonne.
a) How $ch cement should the company order at a time?
b) Instead of ordering EOQ, why not a order convenient 100 tonnes?
Solution:
a) EOQ for cement

2CB

Zp

2 25 2 000
91.287 tonnes
0.2 60

b) Total cost of ordering plan for X 0 91.287 tonnes;

Ke

2CBZp

2 25 2000 0.2 60 1095.454 MU

or we can calculate K e by
Ke

C
X
2000
B Zp
25 91.287 0.2 60 1095.454 MU
X
2
91.287
2

Total cost of ordering plan for X 0 100 tonnes;

Ke

2 000
100
25
0.2 60 1100 MU
100
2

Result:
The extra cost of ordering 100 tonnes at a time is 1 100 $-1095.454 $= 4.55 $.
The production/operations manager therefore should feel confident in using the more
convenient order quantity.
Example 24:
# 2 pencils at the E$ bookstore are sold at a fairly steady rate of 60 per week. The
pencil cost the bookstore 0.02 $ each and sell for 0.15 $ each. It costs the bookstore

12

$ to initiate an order and holding costs are based on an annual interet rate of 25%.
Determine the optimal number of pencils for the bookstore to purchase and the time
between placement of orde$. What are the holding and setup costs for this item?
Solution:
C 60 52 3 210 Units
Zp E

E 0.25 0.02 0.005 MU/unit/yr

2CB
2 3120 12

3 780 Units
E
0.005
X
3 870
T

1.24 yr.
C
3 120
X
3 870
Average Holding Cost
E
0.005 9.675 MU
2
2
C
3 120
Average Ordering Cost
B
12 9.675 MU
X
3 870
X0

Example 25:
A wholesaler has a steady demand for 50 items of a given product each month.
The purchase cost of each item is 6 $ and the holding cost for this item is estimated to be
20% of the stock value per annum. Every order placed by the wholesaler cost 10 $ in
administration charges regardless of the number ordered?
Solution:
C = annual demand = 50x12 = 600 items
p = price unit = 6 $

B = order cost = 10 $
E = holding cost of one item per year = Zp= 0.20x6
X0

2CB

Zp

2 10 600
100items
0.2 6

An order size of 100 is used at an order frequency of N 0

C
600

6times / year
X 0 100

Example 26:
C = Demand/week = 400 unit.
P =Purchase price = 3 $/unit
E = Holding cost = 2 $/100 items/week
B = Order cost =12 $/order
X0 ?

Solution:
X0

2CB

2 40012
692.8 693items
2 / 100

An order size of 693 items is recommended

Example 27:
TT Beverage Co. is a distributor of beer, wine and soft drinks product. From a
main warehouse located in Magusa, TRNC, TT supplies nearly 1000 retail stores with
beverage products. The beer inventory, which constitutes about 40% of the companys
total inventory, averages approximately 50 000 cases. With an average cost per case of
approximately 8$, TT estimates the value of its beer inventory to be 400 000 $.
The warehouse manager has decided to do a detailed study of inventory costs
associated with Sergio Beer, the # 1 selling TT beer. The purpose of the study is to
establish the how-$ch to order, and when to order decisions for Segio Beer that will
result in the lowest possible cost.
The manager found that the demand is constant and 2 000 cases/week.The cost of
holding for the TT beer inventory is 25% of the value of the inventory.
(Note that definding the holding cost as a % of the value of the product is
convenient, because it is easily transferable to other products)

TT is paying 32 $/order regardless of the quantity requested in the order. Suppose

TT is open 5 days each week, and the manufacturer of Sergio Beer guarantees 2-day
delivery on any order placed.
a) Find Economic Order Quantity.
b) Find reorder point.
c) How frequently theorder will be placed?
d) Find the cycle time?
e) Calculate mini$m total inventory cost.
Solution:
a) Find EOQ
X0

2CB

Zp

2 2000 52 32
1824cases
0.25 8

The use of an order quantity of 1824 cases will yield the mini$m-cost inventory
policy for TT beer.
b) Find the reorder point
R0 c t Lt
2000
400
5
R0 400units 2days 800cases

c) How frequently the order will be placed?

N

C 104000

57order / year
X
1824

d) Find the cycle time.

T

1
1

260 4.6days
N 57

The cycle time is 4.6 working days.

e) Calculate mini$m total inventory cost.
Ke

2CBEZp

2104000 32 0.25 8

K e 13312000 3648MU 1824 Total order cost ( 57 32)

1824 Total holding cost (

1824
2 1824)
2