A.J.

Elmhorst - ITSCM 456-01

Inventory Model Practice Problems
1. Race One Motors is an Indonesian car manufacturer. At its largest manufacturing facility,
in Jakarta, the company produces subcomponents at a rate of 300 per day, and it uses
these subcomponents at a rate of 12,500 per year (of 250 working days). Holding costs
are $2 per item per year, and ordering costs are $30 per order.
a. What is the economic production quantity?
i. EPQ= √2DS/H(1-d/p)
ii. D=12,500, S=30, H=2, p=300, d= 12500/250: 50
iii. EPQ= √2(12,500*30)/2(1-50/300)= √750000/1.667= 670.75
b. How many production runs per year will be made?
i. N=D/Q
ii. N=12,500/670.75= 18.64= 19
c. What will be the maximum inventory level?
i. Max inventory level= Q[1-(d/p)]
ii. 670.75[1-(50/300)]= 558.96
d. What percentage of time will the facility be producing components?
i. % of production time=( [(Q/P)xN]/working days)x100
ii. ([(670.75/300)x19]/250)x100
iii. (42.48/250)x100= 16.992%
e. What is the annual cost of order and holding inventory?
i. Annual cost of managing inventory= Annual Holding Cost + Annual
ordering cost
ii. TC= H(Q/2) + S(D/Q)
iii. TC= 2(670.75/2) + 30(12500/670.75)
iv. TC= 670.75 + 559.08= $1229.83
2. Thomas Kratzer is the purchasing manager for the headquarters of a large insurance
company chain with a central inventory operation. Thomas’s fastest-moving inventory
item has a demand of 6,000 units/year. The cost of each unit is $100, and the inventory
carrying cost is $10 per unit per year. The average ordering cost is $30/order. It takes
about 5 days for an order to arrive, and the demand for 1 week is 120 units (this is a
corporate operation, and there are 250 working days/year.
a. What is the EOQ?
i. Q= √2DS/H
ii. D=6000, H= 10, S= 30
iii. Q=√2(6000*30)/10= 134.164
b. What is the cycle inventory if the EOQ is used?
i. Average inventory = Q/2
ii. 134.164/2 = 67.082
c. What is the optimal number of orders per year?
i. D/Q
ii. 6000/134.164= 44.7213= 45
d. What is the optimal number of days in between any two orders?
i. Days in between orders = Working days/Number of orders
 ii. 250/45= 5.556
e. What is the annual cost of ordering and holding inventory?
i. TC= H(Q/2) + S(D/Q)
ii. TC= 10(134.164/2) + 30(6000/134.164)=
iii. TC= 670.82 + 1341.64= $2012.462
3. Amazon sells 20,000 units of consumer electronics from Samsung every month. Each
units costs $100 and amazon has a holding cost of 20%. The fixed clerical and
transportation cost for each order amazon places with Samsung is $4,000. What is the
optimal size of the order that Amazon should place with Samsung?
a. Q= √2DS/H
i. D=20000, S=4000, H= .20*100= 20
ii. √2(20000x4000)/20
iii. √8000000= 2,828.43
b. With the goal of reducing inventories, Amazon would like to reduce the size of
each order it places with Samsung to 2,500 units (allowing it to get four
replenishment orders every month). How much should it reduce the fixed cost
per order for an order of 2,500 units to be optimal?
i. Fixed cost of 2500= √(40000*X)/20
ii. Square both sides= 2500*2500=(40000*X)/20
iii. Multiply both sides by 20= 6250000*20=40000*X
iv. Divide both sides by 40,000= 3125=X
v. Fixed cost should be $3125
4. Chris Beehner Electronics stocks toy remote control flying drones. Recently, the store
has been offered a quantity discount schedule for these drones. This quantity schedule
is shown in the table below. Furthermore, setup cost is $200/order, annual demand is
5,200 units and annual inventory carrying charge as a percent of cost, I, is 28%. What
order quantity will minimize the total inventory cost?
a.
PRICE RANGE QUANTITY ORDERED PRICE/UNIT P0

Initial Price 1-119 $100

Discount 1 120-1499 $98

Discount 2 1500+ $96

b. D=5200, S= 200, H1= .28*100, H2= .28*98, H3= .28*96
c. Q1= √2(5200*200)/28= 272.55
d. Q2= √2(5200*200)/27.44= 275.32
e. Q3= √2(5200*200)/26.88= 278.17
f. Ordering between 120-1499 gives the lowest cost. Though I know we’re
supposed to test the upper limit and lower limit of the next bracket, I can’t
remember how to do that :)