1446650110

INDUSTRIAL ENGINEERING
&
OPERATION RESEARCH
As per New GATE 2016 Syllabus
Thoroughly explained concepts

25 years IES solved papers with explanations
25 years GATE solved papers with explanations
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Industrial Engineering & Operation Research (2016 2017)

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PREFACE
The biggest misconception that a competitive exam aspirant has in mind is that hard work is the only key
to success. In order to crack a competitive exam like GATE, IES etc. one needs to understand and fulfill
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direction.
The birth of this book is based on the feedback of
students who have succeeded in GATE and IES examination. As per them there must be a single book
for a single subject that should fulfill all the requirements of the exam, it must be the closest experience
to a classroom coaching and should have enough problems to enhance the application of knowledge.
Thus we came up with this book in Fluid
Mechanics to help the readers in developing a strong concept of the subject. It has 25 years of solved
questions of GATE and IES.
We at GATEMENTOR have vision to guide the students in the most optimum way so that he could utilize
his potential to the utmost. We hope this book will serve that purpose. Any suggestion from the reader
are welcome. Visit our website www.gatementor.co.in for more information on GATEMENTOR and
GATEMENTOR Publications.
Production Planning and Control: Forecasting models,

aggregate production planning, scheduling, materials
requirement planning.
Inventory Control: Deterministic models; safety stock
inventory control systems.
Operations Research: Linear programming, simplex
method, transportation, assignment, network flow models,
simple queuing models, PERT and CPM.
&
OPERATION RESEARCH
SYLLABUS
&
OPERATION RESEARCH
CONTENT
1.INVENTORY CONTROL
Theory
Gate Objective Questions and Solutions
IES Objective Questions and Solutions
IES Conventional Questions and Solutions
1-1 to 1-12
1-13 to 1-23
1-24 to 1-31
1-32 to 1-35
2.FORECASTING
Theory
2-1 to 2-9
2-10 to 2-14
2-15 to 2-20
2-21 to 2-29
3.QUEUEING MODEL
Theory
3-1 to 3-8
3-9 to 3-13
3-14 to 3-19
3-20 to 3-21
4.PERT AND CPM

Theory
4-1 to 4-12
3-13 to 3-22
3-23 to 3-32
3-33 to 3-37
5. LINEAR PROGRAMMING PROBLEM

Theory
5-1 to 5-20
5-21 to 5-30
5-31 to 5-36
5-37 to 5-40
6.TRANSPORTATION MODEL
Theory
6-1 to 6-7
6-8 to 6-12
6-13 to 6-16
6-17 to 6-21
7. ASSIGNMENT MODEL
Theory
7-1 to 7-6
7-7 to 7-8
7-9 to 7-10
7-11 to 7-14
8. SEQUENCING MODEL
Theory
8-1 to 8-7
8-8 to 8-12
8-13 to 8-14
8-15 to 8-16
9. BREAK EVEN ANALYSIS

Theory
9-1 to 9- 6
9-7 to 9-10
9-11 to 9-15
9-16 to 9-18
10. LINE BALANCING

Theory
10-1 to 10-5
10-6 to 10-7
10-8 to 10-11
10-12 to 10-13
11. WORK STUDY

Theory
11-1 to 11-5
11-6 to 11-9
11-10 to 11-15
11-16 to 11-17
12. MATERIAL REQUIRMENT PLANNING

Theory
12-1 to 12-2
12-3 to 12-4
12-5 to 12-8
12-9 to 12-10
13. PRODUCTION PLANNING AND CONTROL

Theory
13-1 to 13-2
13-3 to 13-4
13-5 to 13-11
Inventory Control
THEORY
1.1 INTRODUCTION
Stores play a vital role in the operation of a company.
It is in direct touch with the user departments in its
day-to-day activities. The Objective of the stores is to
ensure the smooth flow of production without any
interruption. Stores generally include raw material,
work in progress and finished goods. Effective
storekeeping and inventory control are indispensable
to the control of material cost.
1.2 PURPOSE OF STOREKEEPING

(i)
Storekeeping helps to examine carefully all

goods and materials on receipts.
(ii)
It is essential to arrange for a systematic and

efficient storing of materials.
(iii) Storekeeping ensures accurate and prompt

distribution of materials to user departments as
per issue requisition note.
(iv) It is essential because stores often equated
directly with money, as capital is blocked in
inventories.
1.3 INVENTORY RELATED COSTS

1.3.1 PURCHASE (OR PRODUCTION) COSTS ( PC )
It is the cost of purchasing inventory item and it
depends upon quantity or bulk purchase.
Mathematically,
1.3.2 ORDERING (OR SETUP) COSTS

1. ORDERING COST ( OC )
It is the cost associated with bringing inventory items
within the production system. It includes cost of
tender, cost associated with processing and chasing
of purchase order, inspection cost, transportation cost
etc.
2. SETUP COST ( SC )
When inventory items required are produced
internally, the cost associated with bringing
shutdown production system again into starting
position is termed as setup cost. It includes
maintenance cost, schedule chart preparation cost,
Cost associated with arrangement of worker etc.
Mathematically,
OC SC n C0
Where,
n Number of order or setup
C0 Ordering cost per order or setup cost per setup
1.3.3 CARRYING (OR HOLDING) COSTS ( HC )

It is the cost associated with storing and keeping
inventory item with in the production system. This
cost depends upon the quantity and period for which
inventory is stored. It includes storage cost, handling
cost, Locked up cost, capital interest etc.
Mathematically,
PC x C
HC I av Ch
Where,
Where,
PC Purchase cost
HC Holding or carrying cost
x Number of unit
I av Average Inventory
C Unit cost
Ch Holding cost/unit/time
copyright reserved
1-2 | Industrial Engineering & Operation Research
1.3.4. SHORTAGE (STOCK OUT) COST ( SC )
1.4.4 TIME HORIZON
Shortage simply means absence of Inventory and loss

associated with not serving the customer is termed as
shortage or stock-out cost. It includes potential profit
delay loss, fast transportation cost, discount etc.
It is the period over which inventory level can be

controlled. It can be finite or infinite.
Mathematically,
It is the time between ordering a replenishment and

receiving into inventory. It can be deterministic
(constant or variable) or probabilistic.
SC n Cs
SC Shortage cost
n Number of unit short
1.4.5 LEAD TIME
1.4.6 STOCK REPLENISHMENT
Cs = Shortage cost/unit
It is the rate at which items are added to the

inventory. It can be instantaneous or uniform rate.
1.3.5. TOTAL COST ( TC )
1.4.7 REORDER LEVEL
It is the sum of all type of above mentioned cost.
It is the inventory level at which order is placed.
TC PC OC HC SC
Where,
1.4.8 BUFFER STOCK
TC Total cost
It is the minimum stock level that a company

maintains.
PC Purchasing Cost
OC Ordering Cost
SC Shortage or stock out cost
1.4 GENERAL TERMS

1.4. 1 DEMAND
(i)
Customer's demand, size of demand, rate of

demand and pattern of demand is important.
(ii)
Size of demand = no. of items demanded per

period.
1.4.9 ECONOMIC ORDER QUANTITY (E.O.Q)

The economic order quantity (EOQ) is the order
quantity that minimizes total variable cost for the
year.
If purchase cost is independent of number of unit
and no shortage is allowed then total variable cost
will be sum of ordering cost ( OC ) and holding cost (
HC ). The variation of ordering cost ( OC ), holding
Cost ( HC ) and Total Cost ( TC ) with Lot size is
shown below.
(iii) It may be deterministic (Static or dynamic) or

probabilistic (governed by discrete or
continuous probability distribution).
Economic order
Quantity (EOQ)
1.4.2 LOT SIZE
Costs
(iv) The rate of demand can be variable or constant.
Total costs
Holding costs
Number of units ordered in one lot.

Order costs
1.4.3 ORDER CYCLE

It is the time period between placements of two
orders.
Order quantity
Figure 1.1
copyright reserved
Inventory Control | 1-3
1.5 CHARACTERISTIC OF INVENTORY

MODEL
1.6 INVENTORY MODEL
1.5.1 DEPENDENT
ITEM
This model is based on the assumption that all the

parameter associated with inventory can be
computed with certainty. Demand rate and lead time
are independent of demand.
AND
INDEPENDENT DEMAND
Production
MRP
Dependent
No. of class
Demand/
day
20 Cars/day
100 Types/day
1.6.1 DETERMINISTIC INVENTORY MODEL
Independent
1.6.2 PROBABILISTIC INVENTORY MODEL
Forecasting
In this model demand rate and lead time are variable

and fluctuating.
Sales and
Marketing
Figure 1.2
1. DEPENDENT DEMAND ITEM
The demand for these items is not related or linked to
any other items directly. It is difficult to compute and
is projected with the help of forecasting.
2. INDEPENDENT DEMAND ITEM
The demand for these items is directly related or
linked to demand of any other item.
1.5.2 INVENTORY REVIEW SYSTEM
1.7 BASIC DETERMINISTIC INVENTORY

MODELS
(i)
EOQ Model with Uniform Demand
(ii)
EOQ Model with Different rates of Demands in

different cycles
(iii) EOQ Model

allowed
with
Shortages
(iv) EOQ Model with Uniform Replenishment

NOTATIONS USED
Q No of units (or quantity) ordered per order
D Demand of units of inventory per year

N No. of orders per year
1. Q SYSTEM (FIXED ORDER SYSTEM)
TC Total inventory cost (Rs / year)
In this system, when inventory level reaches reorder

level a fresh order is placed at that point of specified
quantity.
C0 Ordering cost per order
In this system size of order is fixed while time of

order is variable. This system is also called Reorder
point system or two bin system.
2. P SYSTEM (FIXED PERIOD SYSTEM)
In this system inventory is reviewed after a fixed
period of time and fresh order is placed at that point.
In this system size of order is variable while time of
order is fixed. This system is also called Periodic
review system.
(backorders)
Ch Cc Carrying or holding cost per unit per period

of time (Rs/unit/year)
Cs Shortage cost per unit per year

Cs Reorder Point
L Lead time (weeks or month etc.)

p Replenishment (or production) rate
d Demand rate
OC Ordering Cost

SC Shortage or stock out cost
Tv Total variable cost

I m Maximum inventory
copyright reserved

OC N C0
I av Average inventory
I av Average inventory
S Shortage allowed per order
Q Order quantity (Lot size)
Q* Economic order quantity (EOQ)

S* Shortage allowed at EOQ
(v)
D
C0
Q
OC
C0 D
Q .(iv)
Carrying cost
I* Maximum inventory at EOQ
1.7.1 MODEL 1- EOQ MODEL

DEMAND
OC
HC I av Ch
WITH
UNIFORM
HC
Q
Ch
2
(v)
(vi) Total variable cost ( Tv )
ASSUMPTIONS
Tv OC HC
1. Demand rate uniform.

2. Replenishment rate infinite (Goods arrive the
same day they are ordered i.e. infinite
replenishment rate).
3. Shortage not allowed.
Tv
(vi)
(vii) Economic order quantity (EOQ or Q*),

At EOQ or Q*
Inventory
Tv Minimum
Maximum
inventory (Im)
Average
Average Inv.
Inventory
Time
Time
tc cycle time
Figure 1.3
(ii) Average inventory

1
I av tc I m tc
2
Im Q
I av
2 2.
(iii) Number of order/year,
D
Q
(iv) Ordering cost ( OC )
0
Q Q*
C0 D Ch
0
Q*2
2
Q* EOQ
EOQ Model with Uniform Demand
(i) Maximum Inventory( I m )

Im Q
dTv
dQ
From equation (vi)
C0 D ChQ
Q
2
2C0 D
Ch
(vii)
(viii) Minimum total yearly variable cost Tv min

(i)
Total variable
Q EOQ (i.e.Q* )
cost
will
be
minimum
at
From equation (vi)
Tv min
(ii)
C0 D ChQ*
Q*
2
From equation (vii)
Tv min
(iii)
2C0Ch D
(viii)
(ix) Total cost ( TC )
TC Tv ( D C )
copyright reserved

TC
C0 D ChQ
(D C)
Q
2
(ix)
At EOQ,
TC min
Sol. (B)
Demand, D 50000 unit / year
Per order cost,
2C0Ch D ( D C )
(x)
Co 3 12
Co 15
If the carrying cost per unit per year is given as %age

of per unit cost or carrying cost is given as
percentage of average inventory cost, then,
Carrying cost per unit per year,
Ch = I x C
Cc 0.06 0.004
Cc Rs 0.084 per unit per year
Where,
I Percentage of average Inventory cost.

EXAMPLE 1.1
In an ideal inventory control system, the economic
lot size for a part is 1000. If the annual demand for
the part is doubled the new economic lot size
required will be
(GATE 1989)
(A) 500
(B) 2000
(C) 1000
(D) 1000 2
Sol (D)
T 2CoCc D
2 15 0.084 50000
T Rs 355
1.7.2 MODEL -2 EOQ MODEL WITH SHORTAGES

(BACKORDERS) ALLOWED
Assumptions of this model are same as those of
model 1 except
2. Replenishment rate infinite (Goods arrive the
same day they are ordered i.e. infinite
replenishment rate).
2C0 D
Ch
3. Shortage allowed.
2C0 2 D
Ch
EOQ 2 EOQ
EOQ 2 1000
Minimum yearly total variable cost,
1. Demand rate uniform.
2C0 D
EOQ
Ch
EOQ
EOQ 2
1000
50000
Quantity
EXAMPLE 1.2
A precision company consumes 5000 unit of a
component per year. The ordering cost are Re 3 per
order. The trucking cost are Rs 12 per order. Interest
cost is Rs 0.06 per unit per year. Deterioration and
obsolescence cost Rs 0.004 per unit / year. Storage
cost is Rs 1000 per year for 50000 units. The total
yearly variable cost at EOQ will be:
(A) Rs 375
(B) Rs 355
(C) Rs 325
(D) Rs 390
Im
C
B
Time
t1
s
t2
F
tc
Figure 1.4
t2 Time during which there is a shortage and back

orders occurs
copyright reserved

t1 Time during which stock is available
SC
t Time between receipt of orders
(vii) Total variable cost ( Tv )
(Reorder cycle time t = t1 + t2)
Tv OC HC SC
Lead time is assumed to be zero.

(i)
Relationship between I m & S
Im S Q
(ii)
Tv
(i)
Average inventory ( I av )& Average shortage

( S av )
C0 D Ch I m2 CS S 2
Q
2Q
2Q
At EOQ (i.e. Q Q* ),
Total variable cost ( Tv ) will be minimum
By minimizing Total variable cost, we get
...(ii)
E.O.Q Q*
and
1
I av tc I m t1
2
(iii)
I m2
2Q
2Co D Ch Cs
Ch
Cs
(ix) Optimum remaining unit after back order (I*) ,
From equation (ii) and (iii),
I av
(iv)
(x)
Optimum amount of back order (S*),

S* Q * I *
Sav
S2
2Q
(v)
(xi) Total optimum inventory cost,
Tv min
(iii) Number of order/year,

N
D
Q
(vi)
Ordering cost ( OC )
OC
D
C0
Q
OC
C0 D
Q
(vii)
HC Ch I av
CI
2Q
(vi) Shortage cost ( SC ),
SC Cs Sav
Cs
Ch Cs
(xii) Total cost ( TC )
TC Tv ( D C )
(i) Total cost per year

(ii) Time between two order
Inventory carrying cost ( HC ),

2
h m
2C 0 Ch D
EXAMPLE 1.3
A particular item has a demand of 9000 unit per year.
The unit cost of the item is Rs 100 and holding cost
per unit is Rs 2.40 per year. The shortage cost is Rs 5
per unit per year price of one item is Rs 1. Determine
OC N C0
(v)
2Co D
Cs
Ch
Ch Cs
I*
Similarly,
(iv)
(viii)
(viii) Economic order Quantity ( EOQ or Q* )
Triangle ABC and AFE are similar triangle,

Im Q
I
t1 m tc
t1 tc
Q
CS S 2
2Q
Sol.
(vii)
Demand
D 9000 unit / year
Ordering cost Co Rs100 / order

Holding cost
Cc Rs 2.4 per unit / year
copyright reserved

Shortage cost
Cs Rs 5 perunit / year
Unit cost
C Rs1
The objective of this model is to determine optimal

production lot size Q*.
For this model it is assumed that
EOQ,
1. Demand and production rate uniform.
2Co D
Cc C2
Cc
Cs
Q*
Q 1053unit
2. Replenishment rate finite

3. Shortage not allowed.
t1 = length of each production run size

(i) Order Quantity (Q),
(i) Total yearly cost,
Cs
T 2Co Cc D
Cc Cs
Q pt1
C D
Cs
2 100 2.4 9000
Cc Cs
(ii) Maximum inventory
1 9000
T Rs10710
d
I m 1 dt1
p
d
I m 1 Q
p
(ii) Time between order,
to
I m pt1 dt1
Q 1053
0.117 year
D 9000
(iii) Average inventory
1
I av tc I m tc
2
42.705day
43day
1.7.3 MODEL 3 EOQ MODEL WITH UNIFORM

REPLENISHMENT
I av
Im
2
I av
Im d Q
1
2
p 2
(iv) Number of order/year,

p
Q
Im
Average inventory level
(v) Ordering Cost ( OC ),
pd
t1
D
Q
I av
t2
OC N C0
OC
D
C0
Q
OC
C0 D
Q
Figure 1.5
(vi) Inventory carrying cost ( HC ),
HC Ch I av
copyright reserved

C0 Rs. 25/order
d Q
HC Ch 1
p 2
Ch Rs. 5/unit/year
(viii) Total variable cost ( Tv )
p 100 units/day
Tv OC HC
D d Q
TC Co 1
Q
p 2
(ix) Economic order Quantity ( EOQ or Q* )
Consumption rate d
EOQ Q*
At EOQ (i.e. Q Q* ),
2C0 D p
Ch
pd
Q 612.37 613units
So Number of Production run
By minimizing Total variable cost, we get
2Co D
Ch
p
pd
(x) Minimum total variable cost ( Tv min )

pd
2CoCh D
p
2Co D
Ch
100 60
2 25 5 15000
100
Rs.1225
(xii) Total cost ( TC )
EXAMPLE 1.4
Determine the number of production runs and also
the total incremental cost in a factory for the data
given below.
(GATE 1997)
Annual
=
15,000 units
requirement
=
Rs.25
Preparation cost per
=
Rs.5/unit/year
order
=
100 units/day
Inventory holding
=
250/year
cost
250
25
10
pd
2 C0 Ch D
pd
p
TC Tv ( D C )
And Total incremental cast
(xi) Maximum Inventory at E.O.Q(I*),

I*
D
Q*
1.7.4 MODEL 4 : GRADUAL

SHORTAGE ARE CONSIDERED.
1. Demand and production rate uniform.

2. Replenishment rate finite
3. Shortage allowed.
Q
Production rate
Number of working
days
Sol.
DEMAND AND
d)
E.O.Q Q*
(p
-
Total variable cost ( Tv ) will be minimum
Tv min
15000
60units/day
250
t
S
Figure 1.6
D 15000 units /year
copyright reserved

d
I m 1 Q S
p
(i)
(ii)
EOQ,
Economic order quantity

EOQ Q*
Qo
2 DC0
C Cs
p
h
Ch
pd
Cs
Total variable cost at EOQ
2Co D Cs p d
Ch Ch Cs p
t1
Qo 4669
month
P 3000
t1 1.56 month
NOTE
(i) For Model I
Cs & p
(iv) Maximum inventory at EOQ ( I * )
d
I* 1 Q* S*
p
EXAMPLE 1.5
The demand for an item in a company is 18000 unit
per year. The company can produce 3000 unit per
month, setup cost is Rs 500, holding Cost is 15 paisa
per unit per month and shortage cost is Rs 20 per
year. The manufacturing time in month will be:
(A) 1.56
(B) 3
(C) 2
(D) 3.56
Sol. (A) :
Given data,
Demand,
(ii) For Model II

p
(iii) For Model III
Cs
NOTE
In some condition discount is offered of unit
purchase price of inventory for large quantity
purchase. These discount take the form of price
break. As discount is offered on unit purchase price
so in order to determine best order size, we need to
consider purchasing cost along with ordering and
holding cost. The problems with price break have
been discussed in below given examples.
D 18000 unit / year
18000
unit / month
12
P
PD
Manufacturing time,
(iii) Maximum inventory at EOQ ( I * )
I*
2Co D Cs Cc
Cc
Cs
Q0 4669 unit
Cs p d
2 DCo Ch
Ch Cs p
Tv EOQ
Cs Rs.1.67 per unit per month
D 1500 unit / month
EXAMPLE 1.6
A company is offered the following price breaks for
order quantity
(GATE 2001)
Order quantity
Price (Rs.)
Production rate,
0 100
150
P 3000 unit / month
101 and above
100
Setup cost
Co Rs 500 / run
Holding cost
Cc 0.15 Rs per unit / month
Shortage cost
Cs Rs 20 per unit per year
Order cost is Rs.60 per order while the holding cost is

10% of the purchase price. Determine the economic
order quantity (EOQ) if the annual requirement is
1000 units.
copyright reserved

Sol.
Sol. (B)
D 1000units/year
Given data,
C0 Rs.60 / order
Demand,
D 50 unit / month
If price is Rs. 150 / unit
Ch1 0.1150 Rs.15 / unit / year
EOQ I
2C0 D
2 1000 60
89.44units
Ch1
15
D 600 unit / year
Ordering cost C0 Rs10 / order

Carrying cost Cc 0.2C C unit cost
90units
1.8 PROBABILISTIC MODEL
If price is Rs. 100/unit (assuming order quantity

is greater than 100)
In this model demand rate and lead time are variable

and fluctuating.
Then
Factors encouraging higher safety stock:-
(i) When the demand rate and lead time fluctuations

are more and variable.
EOQ II
2 1000 60
10
109.5 110 units 100
T .C I
1000
90
60 15 1000 150
90
2
Rs.151342
T .C II
(ii) When the inventory holding cost is very less and

is off not much concern.
(iii) When the loss associated with stock out is very
high.
(iv) When the No. of orders in a year are more
(v) In order to provide better customer satisfaction.
1000
110
60
10 1000 100
110
2
Rs.101095
ROL = Average demand during lead time (ADDLT)

+ Safety Stock (SS) during lead time
ROL ADDLT SS
T .C II T .C I
ADDLT LT d
So, EOQ 110 units

EXAMPLE 1.7
A shop keeper has uniform demand of an item at the
rate of Rs. 50 unit/month. Ordering cost is Rs
10/order and inventory carry cost of is 20% of stock
value. Unit cost of the item is Rs 6. Supplier offers 5%
discount on order between 200 and 999 and 10%
discount on order exceeding or equal to 1000. The
order quantity at which total cost will be minimum is
(A) 100
(B) 200
(C) 300
(D) 104
ROL LT d SS
Qaug
Q
SS
2
Where,
ROL Reorder level
ADDLT = Average demand during lead time

SS = Safety Stock (SS) during lead time
Q = Lot size
Qaug = Average lot size
copyright reserved

Sol.
1.8.1 DEMAND PROFIT MODEL

Static Inventory Model
Demand P
D Demand
0.15 0.15
S Supply
0.25 0.4
IP Incremental Profit/unit
0.15 0.55 p s 1
0.2
0.75 p s
0.1
0.85
0.15 1.00
IL Incremental Loss/unit
In this model demand is uncertain and decision is
based upon single order i.e. re-ordering is not
permitted. This model is applied for perishable items
like vegetables, fruits, flowers etc. or for those items
which become outdated very fast. In order to
maximize our profit we select the ordering quantity (
s ) such that
p s 1
Cumulative
probability
of
having
p s Cumulative probability of having demand s

units.
IP = Incremental Profit/unit when material is sold
IL = Incremental Loss/unit when material is not sold

or material becomes outdated.
EXAMPLE 1.8
A shopkeepers wants to optimize his profit when he
purchase a product for Rs. 70 each and sale it as Rs
100 each if the stock is left unsold he can return it at
Rs. 50 each. Find the optimum stock level for
maximum profit.
Demand
P
0.15
0.25
0.15
0.2
0.1
0.15
Table 1.1
IP 100 70 30
IP
30
0.6 (0.55to0.75)
IP IL 30 20
demand ' s 1 ' units.
Table 1.2
IL 70 50 20
IP
ps
IP IL
Where,
p s 1
CP
Since the above value is between cumulative

probability of demand 4 and 5. Therefore demand 5
will be stock level at maximum profit.
1.8.2 SERVICE LEVEL MODEL

This model is preferred where the loss associated
with stock out is not known exactly. In this model the
level of safety stock is kept according to the level of
service arrangement wants to achieve.
Service level
Number of unitssupplied without delay
total no.of unitsdemanded
LT
S 0 to1
S % 0to100%
95% service level is the standard value at its simply

means that 95% of the customers demand on an
average is fulfilled during lead time and only 5% of
the customers order are rejected because of stock out
during lead time.
When the demand during lead time may be
approximated by a normal distributed curve with a
certain mean x or & standard deviation than
Re-order level is given byROL x z.
copyright reserved

ss z. (safety stock)
Sol.
Where x average demand during lead time
At LT is of 4 weeks & it is one complete cycle so

' ' should be also corresponding to LT.
x LT d
standard deviation for the demand variation

during lead time.
'2 2 2 2 2
z standard normal variate whose value demand

depends upon the level of service management
wants to achieve.
' 2 2 150 300
z Service level %
4 2
(1) Safety stock,
ss z. 1.645 300 494units

(2) ROL LT d ss
0.60 ______80%
4 600 494
1.20 ______ 90%
2894units
1.645 ____ 95%
(3) ss ch 494 0.1 52
2.33 _______ 99%
494 5.2
EXAMPLE 1.9
For a product cost per unit is Rs. 40 and average
weekly demand is of 600 units with weekly standard
deviation of 150 unit holding cost is Rs.
0.1/unit/week and lead time is known to be constant
at 4 weeks than for 95% service level. Value of
standard normal variate (z) for 95 % service level is
1.645.find
Rs 2568.4
(1) Safety stock

(2) ROL
(3) Annual cost of maintaining safety stock
copyright reserved
GATE OBJECTIVE QUESTIONS

(GATE 1989)
1.
(GATE 1999)
In an ideal inventory control system, the

economic lot size for a part is 1000. If the annual
demand for the part is doubled the new
economic lot size required will be
(A) 500
(B) 2000
(C)1000
(D) 1000 2
5.
(GATE 1991)
2.
When the annual demand of a product is 24000

units, the EOQ (Economic Order Quantity) is
2000 units. If the annual demand is 48000 units
the most appropriate EOQ will be
(A) 1000 units
(B) 2000 units
(C) 2800 units
(D) 4000 units
6.
In computing Wilsons economic lot size for an

item, by mistake the demand rate estimate used
was 40% higher than the true demand rate. Due
to this error in the lot size computation, the total
cost of setups plus inventory holding per unit
time, would rise above the true optimum by
approximately
(A) 1.4%
(B) 6.3%
(C) 18.3%
(D) 8.7%
Demands for parts in weeks 1, 2, 3 are : 200, 300,

500 units respectively while available capacities
for production in the three weeks are for: 350,
350, 350 units respectively. Inventory holding
cost is Rs.h per week.
(i)
To minimize total Inventory holding cost

while meeting demands on time,
determine the production quantities in
weeks 1, 2, 3.
(ii)
If the optimization problem above is

formulated as a Linear Program,
determine the Shadow Price of the
capacity constraint in the Third week.
(GATE 1995)
3.
If the demand for an item is doubled and the

ordering cost halved, the economic order
quantity
(A) Remains unchanged
(B) Increases by a factor of 2
(C) Is doubled
(GATE 2000)
(D) Is halved
7.
(GATE 1997)
4.
Determine the number of production runs and

also the total incremental cost in a factory for
the data given below.
Annual
requirement
15,000 units
Rs.25
Preparation cost
per order
Rs.5/unit/year
Inventory
holding cost
100 units/day
250/year
Production rate
Number
of
working days
A company places orders for supply of two

items A and B. The order cost for each of the
items is Rs.300/order. The inventory carrying
cost is 18% of the unit price per year per unit.
The unit prices of the items are Rs.40 and Rs.50
respectively.
The annual demands are 10,000 and 20,000
respectively.
(A) Find the economic order quantities and the
minimum total cost
(B)
A supplier is willing to give a 1% discount

on price, if both the items are ordered from
him and if the order quantities for each
item are 1000 units or more. Is it profitable
to avail the discount?
copyright reserved

12.
0 100
150
A company has an annual demand of 1000

units, ordering cost of Rs.100/order and
carrying cost of Rs.100/unit year. If the stockout costs are estimated to be nearly Rs.400 each
time the company runs out-of-stock, the safety
stock justified by the carrying cost will be
101 and above
100
(A) 4
(B) 20
(C) 40
(D) 100
(GATE 2001)
8.
A company is offered the following price breaks

for order quantity
Order quantity Price (Rs.)
Order cost is Rs.60 per order while the holding

cost is 10% of the purchase price. Determine the
economic order quantity (EOQ) if the annual
requirement is 1000 units.
(GATE 2006)
13.
Price quoted by a supplier
(GATE 2002)
9.
Order quantity (units) Unit price (Rs.)
An item can be purchased for Rs.100. The

ordering cost is Rs.200 and the inventory
carrying cost is 10% of the item cost per annum.
If the annual demand is 4000 units, then
economic order quantity (in units) is
(A) 50
(B) 100
(C) 200
(D) 400
Market demand for springs is 8,00,000 per

annum. A company purchases these springs in
lots and sells them. The cost of making a
purchase order is Rs.1,200. The cost of storage of
springs is Rs.120 per stored piece per annum.
The economic order quantity is
(A) 400
(B) 2,828
(C) 4,000
(D) 8,000
(GATE 2004)
11.
There are two products P and Q with the

following characteristics
Product Demand
(Units)
P
100
Q
400
Order Cost
(Rs/order)
50
50
Holding
Cost
(Rs./unit/year)
4
1
Table 1.3
The economic order quantity (EOQ) of products
P and Q will be in the ratio
< 500
10
> 500
9
Table 1.4
Annual demand: 2500 units per year, Ordering

cost: Rs.100 per order, Inventory holding rate:
25% of unit price.
(GATE 2003)
10.
Consider the following data for an item.
The optimum order quantity (in units) is:
14.
(A) 447
(B) 471
(C) 500
(D) 600
A stockiest wishes to optimize the number of

perishable items he needs to stock in
any
month in his store. The demand distribution for
this perishable item is:
Demand (in units) 2
Probability
0.10 0.35 0.35 0.20

Table 1.5
The stockiest pays Rs.70 for each item and he

sells each at Rs.90. if the stock is left unsold in
any month, he can sell the item at Rs.50 each.
There is no penalty for unfulfilled demand. To
maximize the expected profit, the optimal stock
levelis:
(A) 1:1
(B) 1:2
(A) 5 units
(B) 4 units
(C) 1:4
(D) 1:8
(C) 3 units
(D)2 units
copyright reserved

(GATE 2005)
15.
18.
The distribution of lead-time demand fro an

item is as follows:
Lead time demand Probability
80
0.20
100
0.25
120
0.30
140
0.25
Table 1.6
(B) 50%
(C) 75%
(D) 100%
(GATE 2007)
16.
19.
17.
(B) 2800
(C) 4800
(D) 6800
In machine shop, pins of 15 mm diameter are

produced at a rate of 1000 per month and the
same is consumed at a rate of 500 per month.
The production and consumption continue
simultaneously till the maximum inventory is
reached. Then inventory is allowed to reduce to
zero due to consumption. The lot size of
production is 1000. If backlog is not allowed, the
maximum inventory level is
(A) 400
(B) 500
(C) 600
(D) 700
(B) 250
(C) 225
(D) 260
A company uses 2555 units of an item annually.

Delivery lead time is 8 days. The recorder point
(in number of units) to achieve optimum
inventory is
(A) 7
(B) 8
(C) 56
(D) 60
(GATE 2010)
20.
The maximum level of inventory of an item 100

and it is achieved with infinite replenishment
rate. The inventory becomes zero over one and
half month due to consumption at a uniform
rate. This cycle continues throughout the year.
Ordering cost is Rs. 100 per order and inventory
carrying cost is Rs. 10 per item per month.
Annual cost (in Rs.) of the plan, neglecting
material cost, is
(A) 800
(A) 200
(GATE 2009)
The reorder level is 1.25 times the expected

value of the lead-time demand. The service level
is
(A) 25%
The net requirements of an item over 5

consecutive weeks are 50-0-15-20-20. The
inventory carrying cost and ordering cost are
Re. 1 per item per week and Rs. 100 per order
respectively. Starting inventor is zero, Use
"Least Unit Cost Technique' for developing the
plan. The cost of the plan (in Rs.) is
Annual demand for window frames is 10000.

Each frame costs Rs. 200 and ordering cost is Rs.
300 per order. Inventory holding cost is Rs. 40
per frame per year. The supplier is willing to
offer 2% discount if the order quantity is 1000 or
more, and 4% if order quantity is 2000 or more.
If the total cost is to be minimized, the retailer
should
(A) Order 200 frames every time
(B) Accept 2% discount
(C) Accept 4% discount
(D) Order Economic Order Quantity
(GATE 2014)
21.
Consider the following data with reference to

elementary deterministic economic order
quantity model
Annual demand of an item

100000
Unit price of the item (in Rs.)
10
Inventory carrying cost per unit per year (in 1.5
Rs.)
Unit order cost (in Rs.)
30
Table1.7
The total number of economic orders per year to
meet the annual demand is _______
copyright reserved

22.
A manufactures can produce 12000 bearings per

day. The manufacturer received an order of
8000 bearings per day from a customer. The cost
of holding a bearing in stock, is Rs. 0.20 per
month. Setup cost per production run is Rs. 500.
Assuming 300 working days in a year, the
frequency of production run should be
(A) 4.5 days
(B) 4.5 months
(C) 6.8 days
(D)6.8 months
24. Annual demand of a product is 5000 units and

the ordering cost is Rs. 7000 per order.
Considering the basic economic order quantity
model, the economic order quantity is 10000
units. When the annual inventory cost is
minimized, the annual inventory holding cost (in
Rs.) is____________
(GATE 2015)
23. The annual requirement of rivets at a ship
manufacturing company is 2000 kg. The rivets are
supplied in units of 1 kg consistingRs. 25 each. If
it costs Rs. 100 to place an order and the annual
cost of carrying one unit is 9% of its purchase
cost, the cycle length of the order (in orders) will
be__________
copyright reserved
ANSWER KEY
1 (D) 2 (C) 3 (A)
4
5 (C) 6
7
8
9 (D) 10 (C)
11 (C) 12 (C) 13 (C)
14 (B)
15 (B) 16 (D) 17 (B) 18 (D) 19 (C) 20 (C)
21 (50) 22 (C) 23 (76.996) 24 (35000)
SOLUTION
1.
(D)
EOQ2
2C0 D
EOQ
Ch
2C0 D
Ch
EOQ
EOQ
2.
EOQ2 EOQ1
4.(C)
2C0 2 D
Ch
EOQ 2 EOQ
EOQ 2 1000
D 15000 units /year
C0 Rs 25/order
Ch Rs 5/unit/year
p 100 units/day
(C)
EOQ
2C0 D
Ch
Consumption rate d
EOQ D
EOQ2
EOQ1
EOQ Q*
D2
D
Q*
250
25
10
And Total incremental cast
D2 2D
C02
pd
2 C0 Ch D
C0
2
EOQ2
EOQ2
2C0 D p
Ch
pd
So Number of Production run
(A)
2C0 D
EOQ1
Ch
15000
60units/day
250
Q 612.37 613units
D1
EOQ2
48000
2000
24000
EOQ2 2828 2800
3.
2C0 D
Ch
100 60
2 25 5 15000
100
2C02 D2
Ch
C0
2D
2
Ch
Rs.1225
5. (C)
Total cost 2C0Ch D
% Change in Total cost
copyright reserved

2C0Ch D2 2C0Ch D1
2C0Ch D1
D2 D1
D1
100
100
Where D2 1.4D1
1.4 1 100
18.32%
6.(-)
Total cost at EOQ
TC A total variablecost A Purchasingcost A
TC A
2C0ChA DA C A DA
T .C A
2 10000 300 7.2 40 10000
TC A Rs.406572.67
TC B total variablecost B Purchasingcost B
TC B
2C0ChB DB CB DB
T .C B
2 20000 300 9 50 20000
Available capacities are sufficient for 1st and 2nd

week but in 3rd week 150 units are extra
required
TC B Rs.1010392.305
So, Production in 1st week = 300 units
Total cost for A and B,
2nd week = 350 units
TC TC A TC B
3rd week = 350 units
Rs.1416965
On increasing the production capacity of the

third week by 1 unit, allow me to reduce the
holding cost by 2h and thus reducing the total
cost. This value 2h is nothing but the unit
worth(Shadow price) of the third constraint.
7. ( )
(B) But for 1% Discount
DA 10000units/year
C0 Rs.300 / order
CA 0.99 40 Rs.39.6
Demand of A DA 10000 units / year

Demand of B DB 20000 units / year
CA 0.18 39.6 Rs.7.13 / unit / year
Ordering cast C0 Rs.300 / order
EOQ A
Unit cost
918units
CA Rs 40/ unit
CB Rs 50/ unit
Carrying cast
ChA 0.18 40 Rs.7.2 / unit / year
ChB 0.18 50 Rs.9 / units / year
(A)
EOQ A
2C0 DA
2 10000 300
ChA
7.128
918 is less than 1000 units so to get 1%

discount order at least 1000 units,
Hence order quantity of item A to get discount

is,
QA 1000
So, Total cost for A
T .C A ordering + carrying + Product cost

2C0 DA
912.87 913
ChA
EOQ B
2C0 DB
1154.7 1155
ChB
10000
1000
300
1000
2
7.128 1000 40
T .C A
T .C A Rs.402564
copyright reserved

109.5 110 units 100
For B
DB 20000units/year
T .C I
C0 Rs.300 / order
1000
90
60 15 1000 150
90
2
CB 0.99 50 Rs.49.5
Rs.151342
CB 0.18 49.5 Rs.8.91/ unit / year
T .C II
EOQ B
2C0 DB
2 20000 300
ChB
8.91
Rs.101095
T .C II T .C I
EOQ B 1161units
So, EOQ 110 units
Total cost for B
20000
1161
300
8.91
1161
2
20000 50 0.99
T .C B
9.(D)
EOQ
Rs.1000340
So, under discount Total cost of A and B,

TC TC A TC B
TC Rs. 1402904
Total cost after discount is less than total cost

before discount , therefore it is profitable to
avail discount.
1000
110
60
10 1000 100
110
2
2C0 D
Ch
2 4000 200
0.1 100
400units
10.(C)
EOQ
8.( )
2C0 D
Ch
2 800000 1200
120
D 1000units/year
C0 Rs.60 / order
4000units
If price is Rs. 150 / unit

EOQ I
2C0 D
2 1000 60
Ch1
15
89.44units 90units
If price is Rs. 100/unit (assuming order quantity

is greater than 100)
EOQ P
2 100 50
50
4
EOQ Q
2 400 50
200
1
EOQ P
EOQ Q
1
4
12. (C)
Then
EOQ II
11.(C)
2 1000 60
10
Given,
Demand D 1000unit/year
Ordering cost C0 Rs. 100/order
copyright reserved

Holding cost Ch Rs100/unit/year
So,
Shortage cost Cs Rs.400/unit/yea
EOQ 500 units
Safety stock at EOQ,
2C0 D
Cs
S*
Ch
Ch Cs
2 100 1000
400
S*
100
100 400
S* 40units
14. (B)
Selling Price S Rs. 90
Cost Price C Rs. 70
Salvage value (V) = Rs. 50
Incremental Profit
IP S C 90 70 Rs 20
Incremental loss
13. (C)
D 2500 unit / year
F Rs.100 / order
For Q 500
IL C V 70 50 Rs 20
Cumulative probability
CP
IP
IP IL
CP
20
0.5
20 20
Then unit cost,
Ch 0.2510 Rs.2.5 / unit / year

EOQ
2C0 D
2 2500 100
447units
Ch
2.5
Demand Probability Cumulative

Probability
2500
447
100
2.5 2500 10
T .C
447
2
65.26118
Now,
EOQ 500
EOQ
2C0 D
2 2500 100
Ch
2.22
471units
But 471 500

Get discount at least order should be500 units
Now total cost at Q2 500
2500
500
T .C
100
2.25 2500 9
500
2
Rs.23562.5
T .C EOQ500 T .C EOQ447
0.1
0 to 0.1
0.35
0.1 to 0.45
0.35
0.45 to 0.8
0.2
0.8 to 1
Table 1.7
The value of CPcomesbetween 0.45 to 0.8,
hence optimal stock level will be 4.
Let
Ch Rs.9 0.25 25.225 / unit / year
15. (B)
Expected value of lead time demand ( DLT ),
DLT 80 0.2 100 0.25 120 0.3 140 0.25
Reorder Level,
ROL 1.25 DLT

ROL 1.25 112 140
Since reorder level is 140, which is , which is

equal to maximum possible lead time demand.
Hence Reorder level is sufficient to fulfill lead
time demand. therefore service level will be 100
%.
copyright reserved

16. (D)
17. (B)
p 1000/month
d 500/month
Q 1000
100
Maximum inventory,
d
1 Q
p
500
1
1000
1000
1.5 months
Figure 1.7
C0 Rs.100 / order
Ch Rs.10 / unit / month Rs.120 / unit / year
500
18. (B)
100
D
12 800 units / year
1.5
Ist
Ordering Holding
Ordering cost
cost
Quantity
Total
cost
Total
cost per
Unit
Maximum inventory
50
100
100
I m 100
65
100
30
130
2 min
Lot size,
85
100
90
190
2.235
Q I m 100
105
100
160
260
2.476
2nd
Ordering Holding
Ordering cost
cost
Quantity
Total
cost
Total
cost per
Unit
20
100
100
40
100
20
120
3 min
Cycle time,
tc 1.5month
Number of order per year
1
tc in year
12
tc in month
12
1.5
2nd ordered quantity 40
N 8
Annual cost neglecting material cost
N C0
Q
Ch
2
8 100
100
120
2
Rs.6800
1st ordered quantity = 65
Now, Total Cost=130+120=250

19. (C)
Reorder point = consumption Lead Time
2555
8
365
56
copyright reserved

20. (C)
22. (C)
D 10000 units / year
p 12000 / day
C0 Rs.300 / order
d 8000 / day
Purchase price C Rs.200 / unit
Ch Rs.0.2 / unit / month Rs.2.4 / unit / year
Ch Rs.40 / unit / year
D 300 8000 / year
EOQ
T.C
2C0 D
2 10000 300
387units
Ch
40
10000
387
300
40 200 10000
387
2
C0 Rs.500
E.O.Q Q*
2Co D
Ch
p
54772.255
pd
Rs.2015492
If 2% discount
At least order quantity is 1000
Q 1000
T .C
1000
1000
300
40 200 0.98 1000
1000
2
Rs.1983000
T=t1+t2
If 4% Discount
Figure 1.8
At least order quantity = 2000
Frequency of production run,
Q 2000
T .C
1000
2000
300
40 200 0.96 10000
2000
2
Rs.1961500
Total cost (T.C) is lowest for 4% Discount

So accept 4% discount
21. ( 50 )
2 DC0
Ch
2 100000 30
1.5
Q 2000
Number of orders per year
23.(76.996)
D = 2000 kg/year
EOQ Q
Q
D
54772.255
8000
6.8days
100000
2000
50 order / year
Cost price of rivet C = Rs. 25/kg

Ordering cost C0 = Rs. 100 / order
Carrying cost Ch Rs.25 0.09
Rs.2.25 / kg / year
And EOQ Q
2DF
C
2 2000 100
2.25
Q 421.63
copyright reserved

Cycle length
EOQ Q
D
D
421.63
365
2000
Number of orders per year
D
0.5
EOQ
And
ordering cost per year 5 7000
Rs.35000 / year
76.94days
for EOQ model
24. (35000)
Carrying cost per year = ordering cost per year
D 5000 units / year
Rs.3500 / year
C0 Rs. 7000/order
EOQ = 10000 units
copyright reserved
IES OBJECTIVE QUESTIONS

NOTE
For Assertion (A) and Reason(R) type questions use the following options,
Of these statements
(A) Both A and R are true and R is the correct explanation of A
(B) Both A and R are true but R is not a correct explanation of A
(C) A is true but R is false
(D) A is false but R is true
NUMERICAL
(IES 1994)
(IES 1992)
1.
Out of the following item listed below, which

two items you would consider under category
(C) under ABC analysis.
2.
There are two products A and B with the

following characteristics:
Product
Demand Order cost
Annual usage of items

Item
No.
A
(in Rs/order)
Annual usage Unit cost Rs.

1000
30
0.10
100
100
400
100
300
0.15
200.00
60
0.10
0.30
300
0.10
(A) 1 : 1
(B) 1 : 2
10
0.05
(C) 1 : 4
(D) 1 : 8
0.10
20
0.10
0.20
(A)B and F
(B) C and E
(C) E and J
(D) G and H
(in Rs/unit)
Table 1.8
Holding cost
Table 1.9
The economic order quantities (EOQ)
product A and B will be in the ratio of
of
(IES 1995)
3.
In inventory control theory, the economic order

quantity (EOQ) is
(A) Average level of inventory
(B) Optimum lot size
(C) Lot size corresponding to break even
analysis
(D) Capacity of a warehouse
copyright reserved

Codes :
(IES 1996)
4.
Given that, = procurement cost per order, D =

number of units demanded per year, H =
holding cost per unit per year, i = rate of
interest, P = purchase price per unit. The
procurement quantity per order (Q) is given by
(A) Q
(C) Q
2. .D
H ip
(B) Q
2D
H ip
(D) Q
2. .D
iH p
8.
2.
D H ip
(IES 1997)
5.
Annual demand for a product costing Rs. 100

per piece is Rs. 900. Ordering cost per order is
Rs. 100 inventory holding cost is Rs. 2 per unit
per year. The economic lot size is
(A) 200
(B) 300
(C) 400
(D) 500
(IES 1999)
6.
(B) 180
(C) 100
(D) 120
9.
10.
Match List I (Limits in normal distribution) with

List II (Population covered) and select the
correct answer using the codes given below the
lists:
List I
List-II
A. 3
1. 0.3413
B. 2
2. 0.6826
C. 1
3. 0.9973
4. 0.9545
(A)
(B)
(C)
(D)
A shop owner with an annual constant demand

of A units has ordering costs of Rs. P per
order and carrying costs Rs. I per unit per year.
The economic order quantity for a purchasing
model having no shortage may be determined
from
(A)
24P
AI
(B)
24AP
I
(C)
2AP
I
(D)
2AI
P
In the ABC method of inventory control, Group

A constitutes costly items. What is the usual
percentage of such items of the total items?
(A) 10 to 20 %
(B) 20 to 30%
(C) 30 to 40%
(D) 40 to 50%
(IES 2007)
(IES 2002)
7.
(IES 2006)
A dealer sells a radio set at Rs. 900 and makes

80% profit on his investment. If he can sell it at
Rs. 200 more, his profit as percentage of
investment will be
(A) 160
In the EOQ model, if the unit ordering cost is

doubled, the EOQ
(A) Is halved
(B) Is doubled
(C) Increases 1.414 times
(D) Decreases 1.414 times
11.
If the annual demand of an item becomes half,

ordering cost double, holding cost
onefourth and the unit cost twice, then what is the
ratio of the new EOQ and the earlier EOQ?
(A)
1
2
(C) 2
(B)
1
2
(D) 2
copyright reserved

(IES 2008)
12.
(IES 2011)
In the basic EOQ model, demand is 60 per

month, ordering cost is Rs. 12 per order holding
cost is Rs. 10 per unit permonth, what is the
EOQ ?
(A) 12
(B) 144
(C) 24
(D) 28
16.
(IES 2013)
17.
(IES 2009)
13.
At break- even point, inventory carrying cost is :

(A) Four times the preparatory cost
If demand is doubled and ordering cost, unit

cost and inventory carrying cost are halved,
then what will be the EOQ?
(B) Three times the preparatory cost
(A) Half
(C) Twice
(D) Equal to the preparatory cost
(B) Same
(D) Four times
(C) Two times the preparatory cost

18.
(IES 2010)
14.
When the ordering cost is increased to 4 times,

the EOQ will be increased to :
(A) 2 times
(B) 3 times
(C) 8 times
(D) Remain same
If,D = annual demand for a material (units per

year)
What is the ratio of annual order cost to annual

cost when the order size is determined using
economic order quantity (EOQ) model ?
(A) 0.5
(B) 0.25
(C) 0.75
(D) 1
Q = quantity of material ordered at each order

point (units per order)
C = Cost of carrying one unit in inventory for one
year (rupees per unit per year)
(IES 2014)
19.
S = average cost of completing an order for a

material (rupees per order)
TSC = total annual stocking costs for a material
(rupees per year)
What is the ratio of annual order cost to annual

carrying cost when the order size is determined
using Economic Order quantity (EOQ) model?
(A)0.5
(B)0.25
(C)0.75
(D)1
THEORETICAL
Then the economic order quantity (EOQ) is
15.
(A)
2DS
C
2DC
(B)
S
(C)
2DC
S
(D)
2DS
C
In the inventory control if the yearly demand

for a certain material is fixed, the economic
order quantity gives minimum of
(IES 1998)
20.
Which of the following cost elements are

considered while determining the Economic Lot
size for purchase?
1. Inventory carrying cost
2. Procurement cost
3. Set up cost
(B) Acquisition cost per year
Select the correct answer using the codes given

below:
(C) Total cost per year
(A) 1, 2 and 3
(B) 1 and 2
(D) Number of orders per year
(C) 2 and 3
(D) 1 and 3
(A) Inventory carrying cost per year
copyright reserved

(IES 2007)
(IES 1999)
21.
Consider the following costs:
25.
1. Cost of inspection and return of goods
1.
2. Cost of obsolescence
3. Elimination of the possibility of duplicate

ordering.
4. Cost of insurance
Select the correct answer using the code given

below.
5. Cost of negotiation with suppliers

Which of these costs are related to inventory
carrying cost ?
(A) 1, 2 and 3
(B) 1, 3 and 4
(C) 2, 3 and 4
(D) 2, 4 and 5
26.
(C) 2 and 3 only
(D) 1 and 3 only
EOQ is taken at the point where the cost of

carrying equals the cost of
(C) The safety stock
(A) The value of annual usage of the items
(D) Both the material and the safety stock

27.
(C) Volume of material consumption
The following is the general policy for A class

items in ABC analysis :
1. Very strict control
2. Frequent review of their consumption
3. Safety stock kept
Which of the above statements is/are correct ?
(D) Quantity of materials used
(IES 2005)
In ABC analysis, A items require
(A) 1 only
(B) 1 and 2 only
(A) No safety stock
(C) 2 only
(D) 1, 2 and 3
(B) Low safety stock
(IES 2012)
(C) Moderate safety stock
28.
(D) High safety stock
(IES 2006)
24.
(B) 1 and 2 only
(A) Ordering the materials

(B) The material
ABC analysis in materials management is a

method of classifying the inventories based on
(B) Economic order quantity
(A) 1, 2 and 3
(IES 2010)
(IES 2003)
23.
Improvement in customers relationship
2. Economy in purchasing.
3. Cost of scrap
22.
Which of the following are the benefits of

inventory control ?
Which one of the

system the keeps
amount in storage
when it drops to a
fixed quantity?
following is an inventory
a running record of the
and replenishes the stock
certain level by ordering a
29.
In an economic order quantity based inventory

control, when re-order level is greater than
order quantity, the number of orders
outstanding at any time is
(A) Never more than one
(B)At least one
(C) No order outstanding
(D)One only
ABC analysis is useful because it

1. Identifies vital few and trivial many
2. Classifies items into three classes
(A) EOQ
(B)Periodic
(C) Peripheral
(D)ABC
(A)Neither 1 nor 2
(C) 1 only
(B) Both 1 and 2

(D) 2 only
copyright reserved

30.
In a quantity discount model of inventory

control, the relevant costs are
(A) Four times the preparatory cost

(B) Three times the preparatory cost
(A) Annual purchase cost
(C) Two times the preparatory cost
(B) Annual order cost and annual carrying cost

(C) Annual purchase cost, annual order cost
and annual carrying cost.
(D) Equal to the preparatory cost

34.
(A) Cleaning of inventories
(D) Annual order cost
(B) Disposing of inventories

(C) Processing of inventories
(IES 2013)
31.
(D) Storing of inventories in bins
Purification of inventory means:

(A) Cleaning of inventories
35.
(B) Inefficiency
(C) Processing of inventories
(C) Reliable control of vendors
(D) Storing of inventories in bins

Large size of inventory is a sign of :
(A) Better planning
(B) Inefficiency
(C) Reliable control of vendors
(D) Better scheduling
(IES 2014)
33.
At Economic Order Quantity, inventory

carrying cost is :
Large size of inventory is a sign of:

(A) Better planning
(B) Disposing of inventories
32.
Purification of inventory means :
(D) Better scheduling

36.
In ABC inventory control of spare parts, the

items A, B and C respectively refer to
(A) High stock-out cost, moderate stock-out
cost and low stock-out cost
(B) Low stock-out cost, moderate stock-out cost
and high stock-out cost
(C) Moderate stock-out cost, high stock-out cost
and low stock-out cost
(D) Stock-out costs whose sequence depends on
other factors also
copyright reserved
ANSWER KEY
1
11
21
31
(D)
(D)
(C)
(B)
2
12
22
32
(C)
(A)
(A)
(B)
3
13
23
33
(B)
(NONE)
(B)
(D)
4
14
24
34
(C)
(A)
(A)
(B)
5
15
25
35
(B)
(C)
(B)
(B)
6
16
26
36
(D) 7 (A) 8 (C) 9 (A) 10 (C)

(A) 17 (D) 18 (A) 19 (D) 20 (D)
(A) 27 (A) 28 (B) 29 (D) 30 (C)
(A)
SOLUTION
NUMERICAL
1.(D)
4.(C)
Inventory carrying cost/ unit/ year =Holding
cost + Interest cost=H+ip
Annual consumption value of

Item A 30 0.10 3
Item B 300 0.15 45
Item F 300 0.1 30
EOQ
2D
H ip
EOQ
2DF
C
5. (B)
Item C 2 200 400

Item D 60 0.10 6
2 900 100
300
2
Item E 5 0.3 1.5

Item J 5 0.2 1.0
Item I 20 0.10 2
6. (D)
SP CP 1 r
Item G 10 0.05 0.5
900 x 1 0.8
Item H 7 0.1 0.7
x 500
Least consumption value items are G and H and

they come under C category.
New profit 1100 500 600
2. (C)
EOQ A
EOQ B
2 DF
C A
2 DF
C B
2 100 100
4
1: 4
2 400 100
1
3.(B)
EOQ is optimum lot size because at EOQ total
cost is minimum.
P 600
120%
I 500
7.(A)
8.(C)
EOQ
2 DF
2 AP
C
I
9. (A)
10. (C)
EOQ
2 DF
C
, F odering cost
EOQ ordering cos t
copyright reserved

11. (D)
Annual order cost
2DF
C
EOQ
EOQ1
For EOQ:
D
2F
EOQ1
2
2
C
EOQ
4
2 RCP
Q
R
CH CR EOQ
CH
2
Q
Where,
R is annual requirement
CP is preparation cost
12. (A)
2 DF
2 60 12
12 units
C
10
EOQ
CH is holding cost
THEORETICAL
13. (None)
20. (D)
2DF
EOQ1
C
EOQ 2
2
R
CR
Q
For EOQ
2 2D
Inventory carrying cost and set up cost are

considered and not Procurement cost except
discount model.
F
2
C
2
21. (C)
2 DF
2 EOQ1
C
22. (A)
ABCAnalysis is consumption Analysis.
14.(A)
Where Consumption= Quantity Cost per unit
2DS
EOQ
C
23. (B)
24. (A)
15. (C)
25. (B)
At EOQ
Ordering cost per year = Inventory Carrying
cost per year.
Total inventory cost is minimum.
16. (A)
26. (A)
At EOQ,
Orderingcost per year = Inventory Carrying
cost per year
27. (A)
EOQ F
28. (B)
17. (D)
29. (D)
18. (A)
30. (C)
19. (D)
At the optimal point, annual holding cost is
equal to annual order cost.
Annual holding cost
Q
CH
2
31. (B)
32. (B)
33.(D)
Inventory carrying cost is equal to the
preparatory cost at the Economic order quantity
copyright reserved

35.(B)
To
tal
Large size of inventory is a sign of
Cost
1. Poor scheduling
y
tor ost
n
e
c
Inv ying
r
r
Ca
(TC)min
2. Inefficient planning
3. Vendors are not well-coordinated
Prep
arat
ion
Cost
36.(A)
EOQ
No. of Units
Figure 1.9
34.(B)
Purification of Inventory: The raw material of
particular specification is stored in the
inventory for particular products. If the design
of the products changes or method of
manufacturing changes, then some of the
inventory may become absolute and useless.
Item Quantity
Value/cost (stock out

cost)
Less
High
Moderate Moderate
High
Low
Figure 1.10
Getting the inventory cleared of those obsolete

items is purificationof the inventory.
copyright reserved
IES CONVENTIONAL QUESTIONS

(IES 2002)
1.
Why do we need inventory? Explain why we

need to optimize the order quantity. The
demandfor a component is 10000 pieces per
year. The cost per item is Rs 50 and the interest
cost is1 % per month. The cost associated with
placing an order is Rs 240. What is the EOQ?
(IES 2012)
4.
(IES 2004)
2.
For xyz Company, the annual requirement of an

item is 2400 units. Each item costs the company
Rs. 6. The supplier offers a discount of 5% if 500
or more quantities are purchased. The ordering
cost is Rs. 32 per order and the average
inventory cost is 16%. Is it advisable to accept
the discount? Comment on the result.
Derive an expression for lot size that will

give minimum cost.
(ii)
What is the optimum lot size?
(iv) What will be the total cost per year if the

number of runs has to be an integer?
Name the three costs involved in inventory

control. A store procures and sells certain items.
Information about an item is as follows:
(i)
(iii) What is the number of runs required per

year?
(IES 2008)
3.
A unit manufactures 50,000 bottles of tomato

Ketchup in a year. The factory cost perbottle is
Rs. 6, the set-up cost per production run is
estimated to be Rs. 90 and thecarrying cost on
finished goods inventory are 20% of the cost per
annum. Productionrate is 600 bottles per day
and sales are expected at 150 bottles/day.
(IES 2014)
5.
What is ABC analysis?
Expected annual sales = 8000 units

Ordering cost = Rs. 1800 per order
Holding cost = 10% of average inventory value
The items can be purchased according to the
following schedule:
Lot Size
Unit Price (Rs)
1-999
220
1000-1499
200
1500-1999
190
2000 and above 185

Table1.11
Determine the best order size.
copyright reserved
SOLUTION
1.
Reasons for keeping inventories
Given,
(i)
Demand = 10000unit/year
To stabilize production: The demand for

an item fluctuates because of the number
of factor e.g. seasonality, production
schedule etc. The inventories (raw material
and components) should be made
available to the production as per demand,
failing which results in stock out and the
production stoppage take place for want of
materials. Hence, the inventory is kept to
take care of this fluctuation so that the
production is smooth.
(ii) To take advantage of price discount :

Usually the manufactures offer discount
for bulk buying and to gain this price
advantage the material are brought in bulk
even though it is not required
immediately.
Thus,
inventory
is
maintained
to
gain
economy
in
purchasing.
(iii) To meet the demand during the
replenishment period: The lead time for
procurement of materials depend upon
factors like location of the source, demand
supply condition etc. So inventory is
maintained to meet the demand during the
procurement (replenishment) period.
(iv) To prevent loss of orders (Sales) : In this
competitive scenario, one has to meet the
delivery schedules at 100 percent service
level, means they cannot afford to miss the
delivery schedule which may result in loss
of sales.
(v)
To keep pace with changing market

conditions: The organization has to
anticipate the changing market sentiment
and they have to stock material in
anticipation of non-availability of materials
or sudden increase in price.
Ordering cost or set up cost F = Rs 240/order

Inventory carrying cost or holding cost C = 1%
of Rs 50/unit/month
C
1
50 12 Rs6 / item / year
100
EOQ
2 DF
2 10000 240
C
6
894.42 Components/procurement
2.
D = 2400 units, price per unit = Rs 6.0, Inventory

carrying cost C = 0.16 6 Rs0.96 , ordering cost
F = Rs 32
EOQ
2 DF
2 2400 32
C
0.96
Q* 400units
For EOQ, minimum inventory carrying cost is

Tcm 2DFC 2 2400 32 0.16 6
Tcm 384 Rs.

Total cost = Cost required in buying 2400 unit +
Inventory carrying cost
2400 6 384
14784 Rs.
Now the supplier offers a discount of 5% if
order is more than 500
Now, Total cost = Material cost + Carrying cost
+ Ordering cost
1
0.95 2400 6 500 0.16 6 0.95

2
2400
32
500
14061.6Rs.
Saving annually 14784 14061.6 Rs722.4

The discount is acceptable
copyright reserved

3.
Three cost involved in inventory control are :

(i)
Ordering cost
(ii)
Inventory carrying cost
D = total demand
Q
(iii) Unit cost

D 8000 unit
Qm
Ordering cost = 1800 per order
(P-r)
Inventory carrying cost= 0.1
C p Cost per unit

tp
Inventory carrying cost = I Cp = 0.1 Cp
T-Tb
Let EOQ lies between 1 and 999
Figure 1.10
Then, C p 220 Rs./unit

EOQ
Qm = max inventory level
Qm p r
2 DC0
2 8000 1800
Cp I
220 0.1
Therefore, it is not economical
Average inventory
p r Q Q p r Q
Q
m
av
2
2p
2p
Let, EOQ lies between 1000 and 1499
Total inventory cost TIC,
Then, C p 200
TIC = Setup cost + Holding cost
2 DC0
2 8000 1800
EOQ
Cp I
200 0.1
EOQ 1144.155 1144 unit
d TIC
Since, EOQ lies between 1000 and 1499
dQ
Therefore, the best order size 1200 units.

(i)
expression for lot size that will give

minimum cost
F = setup cast/cycle
0 And
(ii)
d 2 TIC
dQ 2
2 DF p
C pr
Economic lot size

2DF p
C pr
r = no. of item required per unit time or

demand rate
Q*
p = no. of part produced per unit time or

production rate
D 50,000bottles / yr.
T = production cycle time
C p r DF
0
2 p Q2
EOQ Q*
Let
C = holding cast/item per unit time
D
Q pr
F
C
Q
2 p
For TIC to be minimum
1200 unit
4.
Q
p
p 600 bottles / day

r 150 bottles / day
copyright reserved

F Rs.90 / setup
5.
C 0.2 6 Rs.1.2 / unit / year
ABC stands for Always Better Control. It focus on

classifying all the inventories items based on their
usage values. Items of high usage value but small in
number are classified as A items and would be
under strict control. C items are large in number
but requirelittle capital and would be under simple
control. Items of moderate value and size are
classified as B items and would attract reasonable
attention of the management. For example a TV set
has about 5 percent of its part contribute to 80
percent of the total costs. This is true for majority of
items like car, refrigerator etc
Q* 2 50,000
90
600
1.2 600 150
3162.28units
(iii) No. Of runs required
D
50,000
15.8runs
Q * 3162.28
(iv) If runs are to be integer i.e. = N = 16 then,
D
D
50000
Q Q
3125
Q
N
16
Total inventory cost,

TIC
D
Q pr
F
C
Q
2 p
TIC
50000 90 3125 600 150
(
)1.2
3125
2
600
2846.25
copyright reserved

NOTE
copyright reserved
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INDUSTRIAL ENGINEERING

Thoroughly explained concepts

Industrial Engineering & Operation Research (2016 2017)

1st Edition : 2015

Production Planning and Control: Forecasting models,

4.PERT AND CPM

5. LINEAR PROGRAMMING PROBLEM

9. BREAK EVEN ANALYSIS

IES Conventional Questions and Solutions

10. LINE BALANCING

11. WORK STUDY

12. MATERIAL REQUIRMENT PLANNING

13. PRODUCTION PLANNING AND CONTROL

1.2 PURPOSE OF STOREKEEPING

Storekeeping helps to examine carefully all

It is essential to arrange for a systematic and

(iii) Storekeeping ensures accurate and prompt

1.3 INVENTORY RELATED COSTS

1.3.2 ORDERING (OR SETUP) COSTS

n Number of order or setup

C0 Ordering cost per order or setup cost per setup

1.3.3 CARRYING (OR HOLDING) COSTS ( HC )

HC Holding or carrying cost

1-2 | Industrial Engineering & Operation Research

1.3.4. SHORTAGE (STOCK OUT) COST ( SC )

1.4.4 TIME HORIZON

Shortage simply means absence of Inventory and loss

It is the period over which inventory level can be

It is the time between ordering a replenishment and

n Number of unit short

1.4.5 LEAD TIME

1.4.6 STOCK REPLENISHMENT

It is the rate at which items are added to the

1.3.5. TOTAL COST ( TC )

1.4.7 REORDER LEVEL

It is the sum of all type of above mentioned cost.

It is the inventory level at which order is placed.

1.4.8 BUFFER STOCK

It is the minimum stock level that a company

1.4 GENERAL TERMS

Customer's demand, size of demand, rate of

Size of demand = no. of items demanded per

1.4.9 ECONOMIC ORDER QUANTITY (E.O.Q)

(iii) It may be deterministic (Static or dynamic) or

1.4.2 LOT SIZE

(iv) The rate of demand can be variable or constant.

Number of units ordered in one lot.

1.4.3 ORDER CYCLE

Inventory Control | 1-3

1.5 CHARACTERISTIC OF INVENTORY

1.6 INVENTORY MODEL

This model is based on the assumption that all the

1.6.1 DETERMINISTIC INVENTORY MODEL

1.6.2 PROBABILISTIC INVENTORY MODEL

In this model demand rate and lead time are variable

1.5.2 INVENTORY REVIEW SYSTEM

1.7 BASIC DETERMINISTIC INVENTORY

EOQ Model with Uniform Demand

EOQ Model with Different rates of Demands in

(iii) EOQ Model

(iv) EOQ Model with Uniform Replenishment

D Demand of units of inventory per year

1. Q SYSTEM (FIXED ORDER SYSTEM)

TC Total inventory cost (Rs / year)