This Study Resource Was: Practice Questions and Answers Inventory Management: EOQ Model

Practice
Questions and Answers
Inventory Management: EOQ Model
Question 1. Cat Lovers Inc. (CLI) is the distributor of a very popular blend of cat food
that sells for $1.25 per can. CLI experiences demand of 500 cans per week on average.
They order the cans of cat food from the Nutritious & Delicious Co. (N&D). N&D sells
cans to CLI at $0.50 per can and charges a flat fee of $7 per order for shipping and
handling. CLI uses the economic order quantity as their fixed order size. Assume that the
opportunity cost of capital and all other inventory cost is 15 percent annually and that
there are 50 weeks in a year.
a How many cans of cat food should CLI order at a time?
b. What is CLI's total order cost for one year?
c. What is CLI's total holding cost for one year?
m
d What is CLI's weekly inventory turns?
er as
co
eH w
ANSWER:
o.
(a) Holding costs are $0.50 * 15% = 0.075 per can per year. Note that each can is
rs e
purchased for $0.50, so that is the value tied up in inventory and therefore determines
ou urc
the holding cost.
Annual demand = 500/week *50 weeks = 25000/year
√
The EOQ is then 2∗7∗25000 = 2160 cans
o
0.075
aC s
vi y re
(b) The ordering cost is $7 per order. The number of orders in one year is 25000/EOQ.
Thus, order cost= (7 *25000)/EOQ = =81$/year
(c) The average inventory level is EOQ/2. Inventory costs per year
ed d
0.5*EOQ*0.075 = $81
ar stu
(d) Inventory turns=Flow rate / Inventory
Flow Rate= 500 cans per week
is
Inventory=0.5 * EOQ
Thus, Inventory Turns= R / (0.5*EOQ) = 0.462 turns per week = 23.14 turns per year
Th
Question 2. A beer distributor finds that it sells on average 100 cases a week of regular
l2oz. Budweiser. For this problem assume that demand occurs at a constant rate over a
sh
50week year. The distributor currently purchases beer every two weeks at a cost of $8
per case. The inventoryrelated holding cost (capital, insurance, etc.) for the distributor
equals 25 percent of the dollar value of inventory per year. Each order placed with the
supplier costs the distributor $10. This cost includes labor, forms, postage, and so forth.
This study source was downloaded by 100000766337376 from CourseHero.com on 11-03-2021 12:00:54 GMT -05:00
https://www.coursehero.com/file/37804190/Practice-Problems-EOQ1docx/
a. Assume the distributor can choose any order quantity it wishes. What order
quantity minimizes the distributor's total inventoryrelated costs (holding and
ordering)? For the next three parts, assume the distributor selects the order
quantity specified in part (a).
b. What are the distributor's inventory turns per year?
c. Assume the brewer is willing to give a 5 percent quantity discount if the

distributor orders 600 cases or more at a time. If the distributor is interested in
minimizing its total cost (i.e., purchase and inventoryrelated costs), should
the distributor begin ordering 600 or more cases at a time?
ANSWER:
(a) The holding costs are 25% per year  8*0.25 =$2 per year. Annual Demand = 100*50
m
= 5000
er as
√
EOQ= 2∗10∗5000 = 223.6
co
eH w
2
o.
(b) Inventory= EOQ/2= 223.6/2= 111.8
rs e
Inventory turns = 1/T and T = Inventory/Flow Rate, therefore,
ou urc
Inventory turns = Flow Rate / Inventory = 5000 / 111.8 = 44.7 turns per year
(c)You would never order more than Q=600
o
aC s
If we order 600 units unit purchase cost = 0.95*8 = $7.6
vi y re
Inv Cost per item = 7.6*0.25 = $1.9
Total Cost = Purchase Cost + Inv. Cost + Ordering Cost
5000*7.6 +(600/2)*1.9+ (5000/600)*10 = 38,000+570+83.33 = $38,653.33
ed d
ar stu
If we order 223.6 units
Total Cost = Purchase Cost + Inv. Cost + Ordering Cost
5000*8 + (223.6/2)*2 + (5000/223.6)*10 = 40,000 + 223.6 + 223.6 =
$40,447.2
is
Th
The total cost is lower for the case Q= 600; hence, it is better to order 600 units at a time.
Question 3. Millennium Liquors is a wholesaler of sparkling wines. Their most popular
product is the French Bete Noire. Weekly demand is for 45 cases. Assume demand
sh
occurs over 50 weeks per year. The wine is shipped directly from France. Millennium's
annual cost of capital is 15 percent, which also includes all other inventoryrelated costs.
Below are relevant data on the costs of shipping, placing orders, and refrigeration.
• Cost per case: $ 120
• Shipping cost (for any size shipment): $290
• Cost of labor to place and process an order: $10
a. Calculate the yearly and weekly holding cost for one case of wine.
b. Use the EOQ model to find the number of cases per order and the average
number of orders per year.
c. Currently orders are placed by calling France and then following up with a
letter. Millennium and its supplier may switch to a simple ordering system
using the Internet. The new system will require much less labor. What would
be the impact of this system on the ordering pattern?
ANSWER:
(a) Annual holding cost: 15% * 120 $/case = 18 $/year  18/50 = $0.36 /week
m
er as
(b) The ordering cost is $290+$10 = $300. Annual demand = 45*50 = 2,250
co
√
eH w
EOQ= 2∗300∗2250 = 273.9 = 274 cases per order
18
o.
rs e
Number of orders per year = 2,250/274 = 8.2 orders/year.
ou urc
(c) We would get slightly lower ordering costs, which results in more frequent orders and
lower inventory
o
aC s
Question 4. Powered by Koffee (PBK) is a new campus coffee store. PBK uses 50 bags
vi y re
of whole bean coffee very month, and you may assume that the demand is perfectly
steady state throughout the year.
ed d
PBK has signed a yearlong contract to purchase its coffee from a local supplier, Phish
ar stu
Roasters, for a price of $25 per bag and $85 fixed cost for every delivery independent
order size. The holding cost due to the storage is $1 per bag per month. PBK managers
figure their cost of capital is approximately 2 percent per month.
is
a. What is the optimal order size, in bags?
Th
b. In your answer in (a), how many times a year does PBK place orders?
c. In your answer in (a), how many months of supply of coffee does PBK have on
average?
d. On average, how many dollars per year does PBK spend to hold coffee (including
sh
cost of capital)?
Suppose that a South American import/export company has offered PBK a deal for the
next year. PBK can buy a years' worth of coffee directly from South America for $20 per
bag and a fixed cost for delivery of $500. Assume the estimated cost for inspection and
storage is $1 per bag per month and the cost of capital is approximately 2 percent per
month.
e. Should PBK order from Phish Roasters or the South American import/export
company? Quantitatively justify your answer.
ANSWER:
The holding costs are $1.50 per month ($1 storage and $0.50 capital) = $18/year.
Annual demand = 50*12 = 600
2∗85∗600= ¿ =¿
(a) EOQ= 18 75.27
√¿
m
er as
(b) Order frequency: (12 * 50) / EOQ = 8 times per year
co
eH w
(c) Months of supply = T, I = R*T, I = EOQ/2 = 75.27/2, R = 50 bags/month
 T = I/R = (75.27 / 2) / 50 = 0.75 months
o.
rs e
ou urc
(d) Inventory costs per year = (EOQ / 2) * 18 = 677.52 $ / year
(e)
o
For the proposed system
aC s
vi y re
The monthly holding cost per bag is $1 + 0.02 x 20 = $1.4 => yearly holding cost is
12*1.4= $16.8/year
Annual purchase quantity is 12 x 50 = 600 bags.
ed d
ar stu
The average inventory will be 600 / 2 = 300
The yearly holding cost is 300 x $16.8 = $5040.
is
The ordering cost is $500
Th
The annual purchase cost is 600 x $20 = $12,000.
sh
The total annual cost of this option is $12,000 + $500 + $5040 = $17,540.
For the current system
The yearly holding cost is (EOQ / 2) * 18 = 677.52 $ / year
The ordering cost is $85/order* 8 orders/year = 680
The annual purchase cost is 600 x $25 = $15,000.
The total annual cost of this option is $15,000 + $677.52 + $680 = $16,357.
Thus, the original system is cheaper.
Question 5. A large law firm uses 15 packages of copier paper a day. Each package
contains 500 sheets. The firm operates 260 days a year. Holding cost for each package is
$ 1/year, and it costs approximately $ 10 to order and receive a shipment of papers.
m
a) What order quantity would minimize total annual ordering and holding costs?
er as
b) Determine the total annual inventory cost (annual ordering and holding costs).
co
eH w
c) Are annual ordering and holding costs equal when the order quantity follows the
EOQ?
o.
d) Determine the average inventory per year. How long (in working days) does each
rs e
order quantity last?
ou urc
e) The office manager is currently using an order quantity of 100 packages. Would
you recommend that the office manager to use the optimal order quantity instead
of 100 packages? Justify your answer.
o
aC s
ANSWER:
vi y re
Annual Demand= 260 * 15 = 3900, Ordering Cost = $10, Inventory Cost = $1/year

ed d
(a) EOQ = SQRT(2*3900*10/1) = 279.28
ar stu
(b) TC = (279.28/2)*1 + (3900/279.28)*10 = $ 279.28
(c) YES.
is
Th
(d) Average inventory per year = 279.28/2 = 139.64
Each order quantity lasts for 279.28/15 days, i.e. 18.62 days.
sh
(e) TCQ=100 = (100/2)*1 + (3900/100)*10 = $440
Cost savings = $440 – $279.28 = $160.72
Yes. I will recommend, citing the cost savings of $160.72 per annum.
QUESTION 6. Kokia Inc. is a retailer of Laptops. However, Kokia Inc. is also selling T
shirts in their retail stores with a logo of “NHL” on the front and “Kokia” on the back of
each Tshirt. Kokia Inc. acquires these Tshirts at a fixed purchase cost of $16 each, and
sells them at a constant selling price of $20 each. The annual demand for Tshirts is 8000.
The ordering cost is $150/order; and the annual inventory holding cost is 20 percent. The
delivery time for supply is exactly 10 days (assume 1 year = 300 days).
a. What is the minimum cost order quantity? What is the total annual inventory cost (i.e.
holding, ordering, and purchase cost)?
b. What is the average inventory of Tshirts? What is the maximum inventory of T
shirts?
m
er as
c. What is the reorder point of Tshirts? How many orders of Tshirts per year, does
co
eH w
Kokia place to the supplier?
o.
rs e
d. Manager of Kokia is proposed a supply chain relationship to sign up a sourcing
ou urc
contract that reduces the ordering cost to $100, while increasing the demand to
8500/year, purchase cost to $16.50/unit, and selling price to $20.40/unit, while all
o
other data to remain the same as before. However, this supply chain relationship

aC s
requires an annualized investment of $1,200/year to install and maintain a new

vi y re
technology application. Does it make sense to enter into the supply chain relationship
and invest in the new technology application? What will be the profit/loss per year if
the sourcing contract is signed?
ed d
ar stu
ANSWER
is
Annual Demand = 8000 Ordering Cost = $150
Th
Inventory Holding Cost = $16*20% = $3.2/year
LT = 10 days per year = 300
sh
2∗150∗8000= ¿ =¿
a) EOQ= 3.2 866.03
√¿
Total annual inventory cost= holding + ordering+ purchase cost
= (866.03/2)*3.2 + (8000*150)/866.03 + 8000*16
= 130,771.28
b) Average Inv = 866.03/2 = 433.015
Max Inv = 866.03
c) Daily Demand = 8000/300 = 26.67
Reorder point = Daily demand* LT = 10*26.67 = 266.67
Number of orders per year = 8000/866.03 = 9.23
d) Annual Demand = 8500 Ordering Cost = $100
Inventory Holding Cost = $16.5*20% = $3.3/year
2∗100∗8500= ¿ =¿
m
New EOQ= 3.3 717.74
er as
√¿
co
Total annual inventory cost= holding + ordering+ purchase cost
eH w
= 142,618.54
o.
Tech Cost = $1200
rs e
ou urc
Revenue = $173,400
Profit = 29,581.46
o
Revenue without SC = $160,000
aC s
vi y re
Profit without SC = 29,228.72
Yes, Kokia should sign up and invest.
ed d
ar stu
is
Th
sh
Powered by TCPDF (www.tcpdf.org)

This Study Resource Was: Practice Questions and Answers Inventory Management: EOQ Model

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

This Study Resource Was: Practice Questions and Answers Inventory Management: EOQ Model

Uploaded by

Copyright:

Available Formats

Practice

c. Assume the brewer is willing to give a 5 percent quantity discount if the

Annual Demand= 260 * 15 = 3900, Ordering Cost = $10, Inventory Cost = $1/year

other data to remain the same as before. However, this supply chain relationship

requires an annualized investment of $1,200/year to install and maintain a new

You might also like