EXERCISE INVENTORY MANAGEMENT

1. Southeastern Bell stocks a certain switch connector at its central warehouse for
supplying field service offices. The yearly demand for these connectors is 15,000 units.
Southeastern estimates its annual holding cost for this item to be $25 per unit. The cost
to place and process an order from the supplier is $75. The company operates 300 days
per year, and the lead time to receive an order from the supplier is 2 working days.
a. Find the economic order quantity.
b. Find the annual holding costs.
c. Find the annual ordering costs.
d. What is the reorder point?

2. Thomas Kratzer is the purchasing manager for the headquarters of a large insurance
company chain with a central inventory operation. Thomas’s fastest-moving inventory
item has a demand of 6,000 units per year. The cost of each unit is $100, and the
inventory carrying cost is $10 per unit per year. The average ordering cost is $30 per
order. It takes about 5 days for an order to arrive, and the demand for 1 week is 120 units.
(This is a corporate operation, and there are 250 working days per year.)
a. What is the EOQ?
b. What is the average inventory if the EOQ is used?
c. What is the optimal number of orders per year?
d. What is the optimal number of days in between any two orders?
e. What is the annual cost of ordering and holding inventory?
f. What is the total annual inventory cost, including the cost of the 6,000 units?

3. Jordin Henry’s machine shop uses 2,500 brackets during the course of a year. These
brackets are purchased from a supplier 90 miles away. The following information is
known about the brackets:
Annual demand: 2,500
Holding cost per bracket per year: $1.50
Order cost per order: $18.75
Lead time: 2 days
Working days per year: 250

a. Given the information, what would be the economic order quantity (EOQ)?
b. Given the EOQ, what would be the average inventory? What would be the annual
inventory holding cost?
c. Given the EOQ, how many orders would be made each year? What would be the
annual order cost?
d. Given the EOQ, what is the total annual cost of managing the inventory?
e. What is the time between orders?
f. What is the reorder point (ROP)?
4. Bell Computers purchases integrated chips at $350 per chip. The holding cost is $35 per
unit per year, the ordering cost is $120 per order, and sales are steady, at 400 per month.
The company’s supplier, Rich Blue Chip Manufacturing, Inc., decides to offer price
concessions in order to attract larger orders. The price structure is shown in the table.
Rich Blue Chip’s Price Structure
QUANTITY PURCHASED PRICE/UNIT
1–99 units $350
100–199 units $325
200 or more units $300

a. What is the optimal order quantity and the minimum annual cost for Bell Computers
to order, purchase, and hold these integrated chips?
b. Bell Computers wishes to use a 10% holding cost rather than the fixed $35 holding
cost in (a). What is the optimal order quantity, and what is the optimal annual cost?

5. Meena Distributors has an annual demand for an airport metal detector of 1,400 units.
The cost of a typical detector to Meena is $400. Carrying cost is estimated to be 20% of
the unit cost, and the ordering cost is $25 per order. If Purushottama Meena, the owner,
orders in quantities of 300 or more, he can get a 5% discount on the cost of the
detectors. Should Meena take the quantity discount?

6. The catering manager of La Vista Hotel, Lisa Ferguson, is disturbed by the amount of
silverware she is losing every week. Last Friday night, when her crew tried to set up for a
banquet for 500 people, they did not have enough knives. She decides she needs to order
some more silverware but wants to take advantage of any quantity discounts her vendor
will offer.
For a small order (2,000 or fewer pieces), her vendor quotes a price of $1.80/piece.
If she orders 2,001–5,000 pieces, the price drops to $1.60/piece. 5,001–10,000 pieces
brings the price to $1.40/piece, and 10,001 and above reduces the price to $1.25.
Lisa’s order costs are $200 per order, her annual holding costs are 5%, and the annual
demand is 15,000 pieces. For the best option:
a. What is the optimal order quantity?
b. What is the annual holding cost?
c. What is the annual ordering (setup) cost?
d. What are the annual costs of the silverware itself with an optimal order quantity?
e. What is the total annual cost, including ordering, holding, and purchasing the
silverware?
7. M. P. VanOyen Manufacturing has gone out on bid for a regulator component. Expected
demand is 700 units per month. The item can be purchased from either Allen
Manufacturing or Baker Manufacturing. Their price lists are shown in the table. Ordering
cost is $50, and annual holding cost per unit is $5.
LLEN MFG. BAKER MFG.
QUANTITY UNIT PRICE QUANTITY UNIT PRICE
1–499 $16.00 1–399 $16.10
500–999 15.50 400–799 15.60
1,000+ 15.00 800+ 15.10

a. What is the economic order quantity?

b. Which supplier should be used? Why?
c. What is the optimal order quantity and total annual cost of ordering, purchasing, and
holding the component?