ASSIGNMENT 2

(Operation Research)
Maximum Marks: 40
Due Date:

Question 1
The demand for a product is 600 units per week, and the items are withdrawn at a constant
rate. The setup cost for placing an order to replenish inventory is $25. The unit cost of each item is
$3, and the inventory holding cost is $0.05 per item per week.
(a) Assuming shortages are not allowed, determine how often to make a production run and
what size it should be.
(b) If shortage are allowed but cost $2 per item per month, determine how often to order and
what size the order should be.
Solution:
*
(a) Here size of order = Q

2C2 D
= 774.5967
C3

How often to order for time between order = t * Q* / D = 1.291

(b) Size of order =

Q*

2 C2 D
C3

C3 C4
C4

= 812.4039

Time between order = t * Q* / D = 1.3540

Question 2
Neon lights on the U of A campus are replaced at the rate of 100 units per day. The physical
plant orders the Neon lights periodically. It cost $100 to initiate a purchase order. A neon light kept
in storage is estimated to cost about $0.02 per day. The load time between placing and receiving an
order is 12 days. Determine the optimal Inventory policy for ordering the neon lights.
Solution:
D = 100 units per day
C2 = $100 per day
C3 = $0.02 per day
L = 12 days
2C2 D
Q*
C3

2 100 100
1000 neon lights
0.02

The associate cycle length is

T = Q/D = 10 days
Because the lead time
L = 12 days exceeds the cycle length t (=10 days). We must compute L e. The no. of integer
cycles included in L is
n = (largest integer 12 /10 )
Thus,
Le L nt 2 days
The reorder point thus occurs when the inventory level drops to
Le D 2 100 200 neon lights
The inventory policy for ordering the neon lights is order 100 units whenever the inventory order
drops to 200 units.
The daily inventory cost associated with the proposal inventory policy is
C
Q
* 2 C3
Q /D
2
20 / day
Question 3
Find the optimal order quantity for a product for which the price-breaks are as follows:
Items q
0 q < 100
100 q < 200
200 q

Price/Unit
Rs. 20
Rs. 18
Rs. 16

The monthly demand for the product is 600 units. The storage cost is 15% of unit cost and
the cost of ordering is Rs. 30 per order.
Solution:
EOQ at Rs. 20 =
EOQ at Rs. 18 =
EOQ at Rs. 18 =

2 600 30
109.54
20 0.15
2 600 30
115.47
18 0.15
2 600 30
122.47
16 0.15

The EOQ at Rs. 20 per item = 109.54. But the price per item is Rs. 20 only if the items are ordered in the
range of 0 to less then100. This is therefore an infeasible solution. Similarly the EOQ at Rs. 16 per item is
122.47. This price is valid only for items ordered in the range 200 or more. This is also an infeasible
solution.

Question 4
A company stocks an item that is demanded 1000 units per month and the shortages are allowed.
If the unit cost is Rs 20 per unit, the cost of making one purchase is Rs 1000, the holding cost for one
unit is Rs 40 per year and the cost of one shortage is Rs 150 per year, determine:
(a) The economic purchase quantity.
(b) The time between orders.
(c) The number of orders per year.
(d) The optimum shortages.
(e) The maximum inventory.
(f) The time of items being held.
(g) The optimum annual cost.
Solution:
Let
D 1000 units / month 12000 units / year
C1 20 / unit
, C2 1000
C3 40 units / year , C4 150 / year
The economic purchase quantity.
2C2 D C3 C4
Q
C3
C4
= 871.7798
The time between orders.
t * Q* / D
= 0.0726
The number of orders per year
1/ t * 13.774
The optimum shortages
C3
2C2 D
S*
C4
C3 C4
= 183.53
The maximum inventory.
I max Q* S * 688.24
The time of items being held
t1 I max / D 0.0574 / years
The optimum annual cost.
Annual Cost = Item cost + Ordering cost + holding cost + shortage cost
Now
Item Cost = 688.24
Ordering cost = 1000

C3 I max t1
65.84 per order
24
Shortage cost = 65.949
Annual Cost = 1820.02
Holding cost =

So