Ch.

13 Problems Galloway

1. a. Determine an A-B-C classification for these items:

Item   Unit Cost x Annual Volume (00) = Annual Dollar Value Category
1 $100 25 $2,500 B
2 80 30 $2,400 B
3 15 60 $900 C
4 50 10 $500 C
5 11 70 $770 C
6 60 85 $5,100 A
7 10 60 $600 C
$12,770

b. Find the EOQ given this information: D = 4,500 units/year, S = $36, and H = $10 per year.

2 DS 2× 4500 ×36 324000

Q 0=
√ H
=
√ 10
=
√
10
=√ 32400=180 units

c. Find the economic production quantity given this information:

D = 18,000 units/year, S = $100, H = $40, p = 120 units per day, u = 90 units/day

2 DS p 2 ( 18,000 ) 100 120 3600000 120

Q p=
√ √
H p−u
=
√ 40 √
120−90
=
40 √ 30 √
=√ 90000 √ 4=300 ×2=600 units

3. A bakery buys flour in 25-pound bags. The bakery uses 1,215 bags a year. Ordering cost is
$10 per order. Annual carrying cost is $75 per bag.
a. Determine the economic order quantity.
2 DS 2 (1215 ) 10 24300
Q 0=
H √=
75√ =
75√ =√324=18 bags

b. What is the average number of bags on hand?

Q 18
= =9 bags
2 2

c. How many orders per year will there be?

D 1215
Number orders per year= = =67.5
Q 18
d. Compute the total cost of ordering and carrying the flour.

e. If holding costs
Q wereDto increase
18 by1215
$9 per year, how much would that affect the
TC= H+ S= ( 75 ) + ( 10 )=675+ 675=$ 1,350.00
minimum total 2 annual
Q cost?2 18
Ch. 13 Problems Galloway

2 DS 2 (1215 ) 10 24300
Q 0=
√ H
=
√ 84 √=
84
=√289.30=1 7 bags

Q D 17 1215
TC= H+ S= ( 84 ) + ( 10 )=714+ 714.71=$ 1,428.71
2 Q 2 17
$ 1,428.71−$ 1,350.00=$ 78.71increase∈total annual cost

4. A large law firm uses an average of 40 boxes of copier paper a day. The firm operates 260
days a year. Storage and handling costs for the paper are $30 a year per box, and it costs
approximately $60 to order and receive a shipment of paper.

a. What order size would minimize the sum of annual ordering and carrying costs?
2 DS 2 (10400 ) 60 1248000
Q 0=
H√ =
√30
=
30 √ =√ 41600=203.96∨204 boxes

b. Compute the total annual cost using your order size from part a.
Q D 204 10400
TC= H+ S= (30 )+ ( 60 )=3060+3058.82=$ 6,118.82
2 Q 2 204
c. Except for rounding, are annual ordering and carrying costs always equal at the EOQ?
Yes.
d. The office manager is currently using an order size of 200 boxes. The partners of the
firm expect the office to be managed “in a cost-efficient manner.” Would you
recommend that the office manager use the optimal order size instead of 200 boxes?
Justify your answer.
Q D 200 10400
TC= H+ S= ( 30 ) + ( 60 ) =3000+3120=$ 6,120.00
2 Q 2 200
$ 6,120−$ 6,118.82=$ 1.18

No, I would not recommend that the office manager use the optimal order size instead
of 200 boxes. The difference would be only $1.18 more at the optimal order size of 204
boxes so continuing to order 200 boxes is reasonable.

5. Garden Variety Flower Shop uses 750 clay pots a month. The pots are purchased at $2
each. Annual carrying costs per pot are estimated to be 30 percent of cost, and ordering
costs are $20 per order. The manager has been using an order size of 1,500 flower pots.
Ch. 13 Problems Galloway

a. What additional cost is the shop incurring by staying with this order size?
D= 750 x 12 =9000 pots/yr S=$20 H = $2(.3) = $.60

2 DS 2 ( 9000 ) 20 360000
Q 0=
√ H
=
√ .6
=
√ .6
=√ 600000=774.60

Q D 774.6 9000
TC= H+ S= ( .6 ) + ( 20 )=232.38+232.38=$ 464.76
2 Q 2 774.6
Q D 1500 9000
TC= H+ S= ( .6 ) + ( 20 )=450+120=$ 570
2 Q 2 1500
$ 570−$ 464.76=$ 105.24

b. Other than cost savings, what benefit would using the optimal order quantity yield?
The optimal order quantity also provides the benefit of information regarding how much
and how often to order, such as the time between orders and how many orders per
month or year. The average inventory level can also be found with the optimal order
quantity.

15. A manufacturer of exercise equipment purchases the pulley section of the equipment
from a supplier who lists these prices: less than 1,000, $5 each; 1,000 to 3,999, $4.95 each;
4,000 to 5,999, $4.90 each; and 6,000 or more, $4.85 each. Ordering costs are $50, annual
carrying costs per unit are 40 percent of purchase cost, and annual usage is 4,900 pulleys.
Determine an order quantity that will minimize total cost.

Range   Unit Price   H

1 - 999 $5 0.4(5) = $2.00
1000 - 3999 $4.95 0.4(4.95) = $1.98
4000 - 5999 $4.90 0.4(4.9) = $1.96
6000 + $4.85 0.4(4.85) = $1.94

2 ( 4900 ) 50 2 ( 4900 ) 50
Minimum point 5.00=
√ $ 2.00
=495 Minimum point 4.95=
√ $ 1.98
=497

2 ( 4900 ) 50 2 ( 4900 ) 50
Minimum point 4.90=
√ $ 1.96
=500 Minimum point 4.85=
√ $ 1.94
=503

TC= ( Q2 ) H +( DQ ) S+ PD
 Ch. 13 Problems Galloway

TC 495 = ( 4952 )2+( 4900

495 )
50+ $ 5 ( 4900 )=$ 25,489.95

1000 4900
=(
2 )
1.98+ (
1000 )
TC1000 50+ $ 4.95 ( 4900 )=$ 25,490.00

2000 4900
=(
2 )
1.98+ (
2000 )
TC 2000 50+ $ 4.95 ( 4900 )=$ 26,357.50

4000 4900
=( ) 1.96+ (
4000 )
TC 4000 50+ $ 4.90 ( 4900 )=$ 27,991.25
2

6000 4900
TC =( ) 1.94 +(
6000 )
6000 50+ $ 4.85 ( 4900 )=$ 29,625.83
2

There is not much difference in cost between 495 and 1000 pulleys but increases once it gets
over 1000 pulleys. So the order quantity that would minimize costs would be 495 or 1000.

$31,000
$30,500
$30,000
$29,500
$29,000
$28,500
$28,000 TC @ $5
Cost

TC @ $4.95
$27,500
TC @ $4.90
$27,000 TC @ $4.85
$26,500
$26,000
$25,500
$25,000
100
300
500
700
900

1300
1500
1700
1900
2100
2300
2500
2700
2900
3100
3300
3500
3700
3900
4100

4500

4900

5300
1100

4300

4700

5100

5500
5700
5900
6100
6300
6500
6700
6900
7100

Quantity