Inventory Model

1. The daily demand for a commodity is approximately 100 units. Every time an order is placed, a
fixed cost K of 100 is incurred. The daily holding cost h per unit inventory is 2 Pence. If the lead
time is 12 days, determine the economic order quantity and the reorder point.

Solution
We know that
K = 100 per order
D = 100 units/day
h = 0.02 per unit per day
L = 12 days
Using equation (1), the EOQ is
y* = 221001000021000KDh==. units
And the cycle time is
t0* = y*/D = 1000/100 = 10
Because in this case L > t0, the reorder point is calculated as
R = (L-t0) D = (12-10) 100 = 200 units
The above calculation shows that it is most economical to order 1000 units of the commodity
when the inventory level for this commodity reaches 200 units.
2. Suppose the North-west Electronics Company has a product for which the assumptions of the
EOQ inventory model with backorders are valid. Information obtained by the company is as
follows:
The annual demand D = 2000 units/year
The cost per order K = 25
The holding cost rate h = 10 per unit per year
The backorder cost p = 30 per unit per year
Work out the optimal order quantity y*, the optimal backorder level b*, and the cycle time T.
Solve:
The optimal order quantity
y* = *2200025/10 (10+30)/30+ = 115.47 units 115 units
The optimal backorder level
b* = 10/(10+30) 115 = 28.75 units 29 units
The cycle time for place orders
T = y*/D = 115/2000 = 0.0575 year
Since there are 250 working days in a year, the cycle time is 0.0575250 = 14.4 working days.
The total annual cost for operating the inventory is
TC = holding cost
+ setup cost
+ shortage cost
= 10(115-29)2/(2115)
+ 200025/115
+ 29230/(2115)
= 322 + 435 + 110 = 867/year
If the company had chosen to prohibit backorders and had adopted the regular EOQ model, the
recommended inventory decision would have been
y* = (2200025/10) = 100 units
3. Beauty Bar Soap is produced on a production line that has an annual capacity of 60,000 cases.
The annual demand is estimated 26,000 cases, with the demand rate essentially constant
through out the year. The cleaning, preparation, and setup of the production line cost
approximately $135. The manufacturing cost per case is $4.50, and the annual holding cost is
figured at a 24% rate. Thus the holding cost per case per year is h = 0.24 $4.50 = $1.08. What is
the recommended production quantity?
Solve:
We know that
P = 60,000 cases/year
D = 26,000 cases/year
K = $135 per run
h = $1.08 per case per year
So, yDKhPPD===22260001351086000060000260003387. cases
The total annual cost according to y* is
TC* = 22260001351083400060000DKhPDP=.= $2073
The cycle time between production runs is
T = y*/D = 3387/26000 = 0.1327 year
Considering that there are 250 working days in a year,
T = 250 0.1327 33 working days
Thus, we should plan a production run of 3387 units about every 33 working days.
4. R & B beverage company has a soft drink product that has a constant annual demand rate of
3600 cases. A case of the soft drink costs R & B $3. Ordering costs are $20 per order and holding
costs are 25% of the value of the inventory. R & B has 250 working days per year, and the lead
time is 5 days. Identify the following aspects of the inventory policy:
a. Economic order quantity
b. Reorder point
c. Cycle time
5. Nick's Camera Shop carries Zodiac instant print film. The film normally costs Nick $3.20 per roll,
and he sells it for $5.25. Nick's average sales are 21 rolls per week. His annual inventory holding
cost rate is 25% and it costs Nick $20 to place an order with Zodiac. If Zodiac offers a 7%
discount on orders of 400 rolls or more and a 10% discount for 900 rolls or more, determine
Nick's optimal order quantity.
6. Suppose the Higley Radio Components Company has a product for which the assumptions of
theinventory model with backorders are valid. Information obtained by the company is as
follows:
D = 2000 units per year
I = 0.20
C = $50 per unit
Ch = IC = (0.20)($50) = $10 per unit per year
C0 = $25 per order
The company is considering the possibility of allowing some backorders to occur for the product.
The annual backorder cost has been estimated to be $30 per unit per year. Using equations
(7.26) and (7.27), we have
115
30
30 10
10
) 25 )( 2000 ( 2
*

Q

and
29
30 10
10
115 *

S

If this solution is implemented, the system will operate with the following properties:
Maximum inventory = Q S = 115 29 = 86
Cycle time = 4 . 14 ) 250 (
2000
115
) 250 (
D
Q
T working days
The total annual cost is
322 $ ) 10 (
) 115 ( 2
) 86 (
cost Holding
2

435 $ ) 25 (
115
2000
cost Ordering
110 $ ) 30 (
) 115 ( 2
) 29 (
cost Backorder
2

Total cost = $867
If the company had chosen to prohibit backorders and had adopted the regular EOQ model, the
recommended inventory decision would have been
100 000 , 10
10
) 25 )( 2000 ( 2
* Q
This order quantity would have resulted in a holding cost and an ordering cost of $500 each or a total
annual cost of $1000 $867 = $133 or 13.3% savings in cost from the no-stockout EOQ model. The
preceding comparison and conclusion are based on the assumption that the backorder model with an
annual cost per backordered unit of $30 is a valid model for the actual inventory situation. If the
company is concerned that stockouts might lead to lost sales, then the savings might not be enough to
warrant switching to an inventory policy that allowed for planned shortages.