Problems

1. An automobile manufacturer uses about 60,000 pairs of bumpers (front

bumper and rear bumper) per year, which it orders from a supplier. The bumpers
are used at a reasonably steady rate during the 240 working days per year. It
costs $3.00 to keep one pair of bumpers in inventory for one month, and it costs
$25.00 to place an order. A pair of bumpers costs $150.00.
a. Write the annual carrying cost function.
b. Write the annual ordering cost function.
c. Write the annual total cost function.
d. What is the EOQ?
e. What is the significance of the EOQ?
f. What is the total annual expense of ordering the EOQ every time?
g. How many orders will be placed per year?
h. What is the total annual expense of ordering 600 pairs of bumpers
every time? How much is saved per year by ordering the EOQ?

2. The Acme Bumper Co. manufactures bumpers for automobiles for one of the
big three auto companies. About 60,000 pairs of bumpers (front bumper and
rear bumper) are ordered by the auto company per year, at a price of $150.00
per pair. Pairs of bumpers are produced at a rate of about 400 per working day,
and the company operates 240 days per year. The company manufactures other
products, and it must set up the manufacturing system for a production order for
pairs of bumpers, which costs $250.00. It costs $2.50 to store one pair of
bumpers for one month.

Write the annual carrying cost function.

a. Write the annual carrying cost function.
b. Write the annual setup cost function.
c. Write the annual total cost function.
d. What is the EOQ?
e. What is the significance of the EOQ?
f. What is the total annual expense of producing the EOQ every time?
g. How many production runs will be required per year?
h. What is the total annual expense of manufacturing 3,000 pairs of
bumpers per production run? How much is saved per year by producing
the EOQ every time?
1. a. Use the instantaneous model.
b. The annual carrying cost = HQ/2 = 3(12)Q/2 = 18Q.
c. The annual ordering cost = DS/Q = 60000(25)/Q = 1500000/Q.
d. The annual total cost = 18Q + 1500000/Q.

e. Image97 Image98 » 289 pairs of bumpers.

f. Every time the company places an order, it should order 289 pairs of bumpers.
g. The annual total expense = (Q/2)H + (D/Q)S = (289/2)36 + (60,000/289)25 = $10,392.00
per year.
h. The number of orders = D/Q = 60000/289 » 208 per year.
i. The annual total expense = 18(600) + 1500000/600 = $13,300. The annual savings are
$13,300 - $10,392 = $2,908.00.
2. a. Use the noninstantaneous model.
b. The annual carrying cost = (HQ/2)[(P-U)/P] = (2.50(12)Q/2)[(400 - 60000/240)]/400 =
5.625Q.
c. The annual setup cost = DS/Q = 60000(250)/Q = 15000000/Q.
d. The annual total cost = 5.625Q + 15000000/Q.

e. EOQ = Image99 Image100 = Image101 x =

Image102 1,633 pairs of bumpers.
f. The company should place a production order for 1,633 pairs of bumpers every time.
g. The annual total cost = 5.625EOQ + 15000000/EOQ = 5.625(1633) + 15000000/1633 »
$18,371.00 per year.
h. The number of production runs = D/EOQ = 60000/1633 = 36.74 runs per year.
i. The annual total cost = 5.625(3000) + 15000000/3000 = $21,875.00. The annual savings
are $21,875.00 - $18,371.00 = $3,504.00.
i.