Tutorial 2 – Inventory Control Models

1. Lisa has determined that the annual demand for number 6 screws is 100,000 screws. She
estimates that it costs $10 every time an order is placed. Furthermore, she estimates that the cost
of carrying one screw in inventory for a year is one-half of 1 cent. Assume that the demand is
constant throughout the year.

a) How many number 6 screws should Lisa order at a time if she wishes to minimize total
inventory cost?
b) How many orders per year should be placed? What would the annual ordering cost be?
c) What would the average inventory be? What would the annual holding cost be?

2. The CariKomputer Dot Com Store sells a printer for RM 200. Demand for this is constant during
the year, and annual demand is forecasted to be 600 units. The holding cost is RM 20 per unit per
year, while the cost of ordering is RM 60 per order. Currently, the company is ordering 12 times
per year (50 units each time). There are 250 working days per year and the lead-time is 10 days.

a) Given the current policy of ordering 50 units at a time, what is the total of the annual ordering
cost and the annual holding cost?
b) If the company used the absolute best inventory policy, what would the total of ordering and
holding cost be?
c) What is the reorder point?

3. The following table shows that price schedule for purchasing a product.

Order Size 0-99 100-199 200-499 500 or more

Price per Unit $20.00 $19.50 $19.00 $18.75

A company who buys the products estimates the holding cost at 10% of purchase price per year
and ordering costs at $40 per order. The company’s annual demand is 460 units.

a) Determine the size of each order.

b) Determine how often the company should order.
c) Determine the price that company should order.