INVENTORY MANAGEMENT (TUTORIAL 3)

Q1. A local company produces a programmable EPROM (erasable programmable read-only

memory) for several industrial clients. They have experienced a relatively flat demand of 2500
units per year for the product. The EPROM is produced at a rate of 10000 units per year. The
accounting department has estimated that it costs $50 to initiate a production run, each unit costs
the company1$2 to manufacture, and the cost of holding is based on a 30% annual interest rate.
Determine the optimal size of a production run, the length of each production run, and the average
annual cost of holding and setup. What is the maximum level of on-hand inventory of the
EPROMs?
Q2. Drugs online (DO) is an online retailer of prescription drugs and health supplements. Vitamins
represent a significant percentage of its sales. Demand for vitamins is 10,000 bottles per month.
DO incurs a fixed order placement, transportation and receiving cost of $150 each times an order
for vitamins is placed with the manufacturer. Do incurs a holding cost of $0.75/bottle/month and
Shortage cost of $2/bottle/month. Find out the optimal order quantity, shortage level and maximum
inventory level and total inventory cost?

Time during which inventory is on hand  t1  Q  S

D
Time during which there is a shortage  t2  S
D
Q3. The I-75 Carpet Discount Store in North Georgia stocks carpet in its warehouse and sells it
through an adjoining showroom. The store keeps several brands and styles of carpet in stock;
however, its biggest seller is Super Shag carpet. The store wants to determine the optimal order
size and total inventory cost for this brand of carpet given an estimated annual demand of 10,000
yards of carpet, an annual carrying cost of $0.75 per yard, and an ordering cost of $150. The store
would also like to know the number of orders that will be made annually and the time between
orders (i.e., the order cycle) given that the store is open every day except Sunday, Thanksgiving
Day, and Christmas Day (which is not on a Sunday). Now if store person allowed back-ordering
with back-oreder cost $200, then what is the new optimal order size.

Q4. A retailer estimates her fixed cost for placing an order at $1,000. Presently she orders in
optimal quantities of 400 units. She has, however, heard of the benefits of just-in-time purchasing
– a principle that advocates purchasing goods in smaller lots as a means of keeping inventory
down. If she wishes to order in lots no larger than 50, what should be her fixed ordering costs?