NATIONAL INSTITUTE OF TECHNOLOGY CALICUT

Department of Mechanical Engineering

ME3102D Management of Production Systems
Tutorial Worksheet 3 – Inventory Control
Monsoon 2022-23
Maximum Marks: 25

1) A company uses annually 50,000 unit of an item each costing Rs 1.20. Each order costs Rs 45 and
inventory carrying cost 15% of annual average inventory value.
(a) Find EOQ.
(b) If the company operates 250 days a year, the procurement time in 10 days and safety stock is 500
units, find re-order level, maximum, minimum and average inventory.
(2.5 Marks)

2) The annual demand for a product is 3,600 units, with an average of 12 units per day. The lead time
is 10 days. The ordering cost per order is Rs 20 and the annual carrying cost is 25% of the value of the
inventory. The price of the product per unit is Rs 3.
(a) What will be the EOQ?
(b) Find the purchase cycle time.
(c) Fine the total inventory cost per year.
(d) If a safety stock of 100 units is considered necessary, what will be the reorder level and the total
annual cost of inventory which will be relevant to inventory decision. (2.5Marks)

3) An engine manufacturing company stocks the items as shown in the following table in its stores. The
unit price, annual consumption quantity in terms of units/year are given in the same table. Classify the
items into A, B and C categories:
Component Descriptions Price/ unit Annual Demand
code (Rs) (Units/year)
C001 Connecting rod 500 600
C002 Crank case 4000 600
C003 Cylinder 2000 600
C004 Cylinder head 3000 600
C005 Crank shaft 4000 600
C006 Cam 500 1200
C007 Nozzle 500 600
C008 Valve set 1000 1200
C009 Fuel injecting pump 1500 600
C010 Exhaust Pipe 500 600

(5 Marks)

4) A diesel engine manufacturing company has planned its production schedule for next year based on
the forecasted demand, back orders and plant capacity. Instead of manufacturing the piston, that goes
in the final product, the company has decided to buy the piston from ABC company. The number of
piston required are at the rate of 60 per day. Ordering costs have been estimated at Rs 50 per order and
the carrying cost fraction is 0.15. All the assumptions of the basic EOQ model are applicable. The
company however can take advantage of one of several quantity discounts. The pricing schedule of
ABC is listed as follows:
Quantity Ordered Unit Price (Rs)
0-1999 65
2000-4999 60
5000-10000 55
Over 10000 50
(a) What is the optimal order quantity?
(b) What is the minimum inventory cost? (5 Marks)

5) A dealer supplies the following information with regard to a product dealt in by him
Annual demand :10000 units
Ordering cost :Rs 10 per order
Inventory carrying cost : 20% of value of inventory per year
Price :Rs 20 per unit
The dealer is considering the possibilities of allowing some back-orders (stock out) to occur. He has
estimated that the annual cost of back-ordering will be 25% of the value of inventory
(i) What should be the optimum number of units of the product he should buy in one lot?
(ii) What quantity of the product should be allowed to be back ordered, if any?
(iii) What would be the maximum quantity of inventory at any time of the year?
(iv) Would you recommend to allow back-ordering? If so, what would be the annual cost
saving by adopting the policy of back-ordering?
(5 Marks)

6) A product is priced to sell at Rs.100 per unit, and its cost is constant at Rs.70 per unit. Each unsold
unit has a salvage value of $20. Demand is expected to range between 35 and 40 units for the period;
35 definitely can be sold and no units over 40 will be sold. The demand probabilities and the associated
cumulative probability distribution (P) for this situation is shown below.
Number of units demanded Probability of this demand
35 0.10
36 0.15
37 0.25
38 0.25
39 0.15
40 0.10

How many units should be ordered? (5 Marks)

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