INVENTORY MANAGEMENT Q1 Westside Auto purchases a component used in the manufacture of automobile generators directly from a supplier.

Westsides generator production operation, which is operated at a constant rate, will require 1000 components per month throughout the year (12,000 units annually). Assume that the ordering costs are $25 per order, the unit cost is $2.50 per component, and the annual holding costs are 20% of the value of the inventory. Westside has 250 working days per year and a lead time of 5 days. Answer the following inventory policy questions? a. What is the EOQ for this component? b. What is the reorder point? c. What is the recycle time? d. What are the total annual holding and ordering costs associated with your recomended EOQ? e. What is the total inventory cost? Q2 Wilson Publishing Company produces books for the retail market. Demand for a current book is expected to occur at a constant annual rate of 7200 copies. The cost of one copy of the book is $14.50. The holding cost is based on an 18% annual rate, and production setup costs are $150 per setup. The equipment on which the book is produced has an annual production volume of 25,000 copies. Wilson has 250 working days per year, and the lead time for production run is 15 days. Use the production lot-size model to compute the following values: a. Minimum cost production lot size. b. Number of production runs per year. c. Cycle time. d. Length of production run. e. Maximum inventory. f. Total annual cost. g. Reorder point. Q3 Keith Shoe Stores carries a basic black dress shoe for men that sells at an approximate constant rate of 500 pairs of shoes every three months. Keiths current buying policy is to order 500 pairs each time an order is placed. It costs Keith $30 to place an order. The annual holding cost rate is 20%. With the order quantity of 500, Keith obtains the shoes at the lowest possible unit cost of $28 pe pair. Other quantity discounts offered by the manufacturer are as follows. Order Quantity Price per Pair ($) 0 99 36 100 199 32 200 299 30 300 or more 28 What is the minimum cost order quantity for the shoes? What are the annual savings of your inventory policy over the policy currently being used by Keith?

Q4 The Gilbert Air-Conditioning Company is considering the purchase of a special shipment of portable air conditioners manufactured in Japan. Each unit will cost Gilbert $80, and it will be sold for $125. Gilbert does not carry surplus air conditioners over until the following year. Thus, all surplus air conditioners will be sold to a wholesaler for $50 per unit. Assume thet the air conditioner demand follows a normal probability distribution with = 20 and = 8. a. What is the recomended order quantity? b. What is the probability that Gilbert will sell all units it orders? Q5 Assume the following quantity discount schedule is appropriate. Order Size Discount (%) Unit Cost ($) 0 to 49 0 30.00 50 to 99 5 28.50 100 or more 10 27.00 If annual demand is 120 units, ordering costs are $20 per order, and the annual holding cost rate is 25%, what order quantity would you recommend?

A1 a. Q* =
2 DCo = Ch 2(12, 000)(25) = 1095.45 (0.20)(2.50)

b. r = dm = c. T =

1200 (5) = 240 250

250Q* 250(1095.45) = = 22.82 12, 000 D

d. Holding

1 1 QCh = (1095.45)(0.20)(2.50) = $278.86 2 2 D 12, 000 Ordering Co = (25) = 273.86 Q 1095.45

e. Total Cost = $547.72 A2 a. Q* =

2 DCo 2(7200)(150) = = 1078.12 7200 (1 D / P)Ch 1 25000 (0.18)(14.50)

b. Number of production runs = D / Q* = 7200 / 1078.12 = 6.68

250Q 250(1078.12) = = 37.43 days D 7200 Q 1078.12 = = 10.78 days d. Production run length = P / 250 25000 / 250

c. T =

e. Maximum Inventory
7200 D 1 P Q = 1 25000 (1078.12) = 767.62

f. Holding Cost
1 D 1 7200 1 QCh = 1 (1078.12)(0.18)(14.50) = $1001.74 2 P 2 25000

Ordering cost =

D 7200 Co = (150) = $1001.74 Q 1078.12

Total Cost = $2,003.48 g. r = dm =

D 7200 m = 250 (15) = 432 250

A3 Q* = 300; Savings = $480

A4 a. co = 80 - 50 = 30 cu = 125 - 80 = 45
P( D Q*) = cu 45 = = 0.60 cu + co 45 + 30

P(D Q*) = 0.60

=8

20 Q*

For an area of 0.60 below Q*, z = 0.25 Q* = 20 + 0.25(8) = 22 b. P(Sell All) = P(D Q*) = 1 - 0.60 = 0.40 A5
Q= 2 DCo Ch 2(120)(20) = 25.30 0.25(30) 2(120)(20) = 25.96 0.25(28.5)

Q1 =

Q1 = 25

Q2 =

Q2 = 50 to obtain 5%

discount

Q3 =

2(120)(20) = 26.67 0.25(27)

Q3 = 100 to obtain 10% discount

Category 1 2 3

Unit Cost 30.00 28.50 27.00

Order Quantity 25 50 100

Holding Cost 93.75 178.13 337.50

Order Cost 96 48 24

Purchase Cost 3600 3420 3240

Total Cost $3,789.75 $3,646.13 $3,601.50

Q = 100 to obtain the lowest total cost. The 10% discount is worthwhile.