A.

The following information refers to the various annual costs relating to the
inventory of a single-product company:
Unit transportation-in costs on purchases $0.20
Storage per unit 0.12
Insurance per unit 0.10
Annual opportunity cost (interest lost on
alternative investment of funds) $800
Annual number of units required 10,000
Invoice processing $20 per order
Permit fees for shipping $100 per order
Unloading cost $90 per order

Required:
1. Determine the Economic Order Quantity for the above product.
2. How much is the ordering costs? Carrying Costs? Total costs?

B. Raymond Company sells designer jeans at $35 each. The jeans cost $20,
including delivery costs. Raymonds cost of capital, insurance, and taxes on
inventory amount to 25 percent of the inventory cost per year. It has been
estimated that each pair of jeans in inventory requires a share of the fixed
warehouse space that is worth $1 per year. There is sufficient warehouse
space to handle up to 5,000 pairs of jeans. Additional warehouse space would
cost $4,000 per month per 1,000 pairs of jeans stored. Order costs amount to
$80 per order.

Required: what is the economic order quantity for Raymond Companys jeans
if demand is 60,000 pairs per year?

C. TRS Incorporated has to manufacture 100,000 specialized bulbs for its

transformer division. The bulbs will be used evenly throughout the year. The
set up cost every time a production is made is $800, and the cost to carry
bulbs in inventory for the year is $4. TRSs objective is to produce the bulbs at
the lowest possible cost.

Required:
1. Determine the economic production run and the total cost per production
run.
2. How many production runs should TRS make for the year?

D. Ice Prince Company presented you the following information to deal with its
inventory management policies. Presently, Ice Prince is involved in the
production of musical products with its German engineered Daedlufetarg
music line. Production of this product involves the following inventory,
carrying and storage costs:
Orders must be placed in round lots of 100 units
Annual unit usage is 250,000. (the company has 50-week base
operation)
The carrying cost is 10% of the purchase price.
The purchase price is $10 per unit
The ordering cost is $100 per order
The desired safety stock is 5,000 units. This does not include deliver
time stock.
The delivery time is one week
 Given the above information, provide Ice Prince Management answers to
the following questions:

1. Determine the EOQ level

2. How many orders will be placed annually?
3. What is the inventory order point (that is, at what level of
inventory should a new order be placed?)
4. What is the average level of inventory?
5. What would happen to the EOQ if annual unit sales doubled?
What is the elasticity of EOQ with respect to sales?
6. If carrying costs double, what would happen to the level of EOQ?
(Assume the original sales level of 250,000) What is the
elasticity of with respect to carrying costs?
7. What assumptions are being made by the EOQ that has been
used here?
8. If Ice Prince could decrease its ordering cost, perhaps by
improving its relationship with suppliers, how would this affect
your EOQ computations?

E. Jacks Ball Bat company buys ballbats from a manufacturer for $10 each. Jack
expects to sell 90,000 bats evenly over the next year. Jacks cost of capital is
10 percent. The total out-of-pocket costs to carry one bat in inventory is
$0.50. The cost of ordering bats is $15 per order.

Required:
1. What quantity of units should Jack be ordering, if he understood EOQ
2. If Jack was able to determine the proper economic order quantity, how
many times would he have to place an order?
3. Jack sells bats on 300 days of the year. The lead time on order is 2 days.
At what point should Jack place his orders?

F. Solvex Company uses 30,000 units of Epsol yearly to manufacture Aerosol.

The company has an EOQ of 3,000 units. The following probabilities are
applicable. The cost of one stock out is estimated at P12,500.
Safety stock Probability of stock out
250 .30
750 .20
850 .15
0 .60
Carrying cost per unit is P65 annually.

Required: What is the level of safety stock that will minimize total cost?

G. The Zelfon Company carries a safety stock of 1,200 units at a carrying cost of
P25 per unit. The company incurred a total stockout and safety stock carrying
costs of P125,000 for the year. 27,500 units were used by the company. The
company has an EOQ of 1,000 units. If a stockout probability of 0.05 is
associated with the safety stock of 1,200.

Required: What is the cost of a stockout?

H. A company wishes to determine the optimal amount of safety stock that it

should maintain for its product. The following information is known:
 Stock out cost $240 per occurrence
Carrying cost of safety stock $5 per unit
Number of purchase orders 10 per year

The following options are available to the company:

Units of Safety Stock Probability of Stock
Out
20 50%
40 40
60 30
80 20
100 10
Required:
1. What is the optimum level of safety stock the company should
maintain?
2. How much is the total related inventory cost of the optimum safety
stock?

I. The following data are available about a companys inventory:

Invoice price $125 per unit
Invoice processing $ 23 per order
Permit fees for shipping $300 per order
Excise tax 4% of invoice price
Inventory tax 2% of invoice price
Insurance on shipments $2 per unit
Warehouse rental $1,000 per month
Unloading cost $90 per order
Cost of capital 15%
Annual usage 100,000 units
Lead time 10 days
Business days in a year 250 days
Maximum lead time 12 days

Required:
1. How much is the carrying cost per unit of inventory?
2. How much is the ordering cost per order?
3. What is the companys Economic Order Quantity?
4. How much is the total related inventory cost of the Economic Order
Quantity?
5. How many orders must the company make for a year?
6. What is the companys safety stock?
7. What is the companys reorder point?

J. Sundust Company must manufacture 100,000 brooms evenly throughout the

upcoming year. The set up cost $80, and the cost to carry a broom in
inventory for six months is $0.20. Sundusts objective is to produce the
brooms at the lowest cost possible. Assuming that each production run will be
for the same number of brooms, how many production runs should Sundust
make?

K. An automobile manufacturer plans to spend $ billion to improve the quality of

a new model. The manufacturer expects the quality improvement program to
eliminate the need for recall and reduce the cost for warranty repairs. The
firms experience had been, on average, 1.5 recalls for each new model at the
 cost of $300 per vehicle. The average cost per recall, if one is need, is to
increase by 10 percent for the new model. Costs for other warranty repairs
will decrease from $200 to $80 per unit. Sales of the new model were
expected to be 500,000 units without the quality improvement program. The
firm believes that the well-publicized quality improvement program will
increase the total sales to 650,000 units. If there is a profit of $5,000 per unit,
is the $1 billion expenditure justified?

L. JVC Audio Company manufactures Cassette Tapes. The desired speed of its
model SF2000 is 2 inches per second. Any deviation from its value distorts
pitch and tempo resulting in poor sound quality. The firm sets quality
specification to 2 0.25 because an average customer is likely to complain
and return the Cassette Tape is off by 0.25 inch per second. The cost per
return is $36. The repair cost before the tape is shipped, however, is only $3
per tape.

Required:
1. Compute the Loss if the observed value for the quality
characteristic is 2.12 inches.
2. Estimate the tolerance for the firm to minimize its cost.