MGT3114

Exam 5 Formula Sheet and Review Problems

Upper Control Limit (UCL) =𝑋̿ + 𝑧𝜎𝑥̅

Lower Control Limit (LCL) = 𝑋̿ − 𝑧𝜎𝑥̅

σ𝑥̅ = 𝜎/√𝑛
Z=x–μ
σ
𝑄 𝑄 𝐷
Annual Carrying Cost = (2) 𝐻 𝑇𝐶 = ( 2 ) 𝐻 + (𝑄) 𝑆

𝐷
Annual Ordering Cost = ( )𝑆 Q0 = √(2𝐷𝑆/𝐻)
𝑄

# of Orders = D/Q

Length of Order Cycle = Q/D

EOQ = Square root of 2DS

H
TC= Q/2 (H) + D/Q (S) + P(D)

ROP = D x LT
ROP = (D x LT) + SS
ROP = expected demand during lead time + Zσ

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Problem #1 A-D:
The newest LEGO police set, Police-The Big Escape, consist of 133 parts. LEGO routinely
samples batches and has determined that the process normally produces sets with an average
weight of 455 grams and a standard deviation of 2 grams. The distribution of the process is
normal.
a. What is the UCL if 95% of the sample means should fall within the control limits and
sample sizes are 30?
b. What is the LCL if 95% of the sample means should fall within the control limits and
sample sizes are 30?
c. An operations manager observes sample means of 454.9, 455.12, 454.10, and 458.36.
Based on the UCL and LCL calculated above, is the process in control?
d. Specifications for the sets are made by Lego, demanding that the weight of each set
must fall between 453 and 457 grams. What percentage of the sets will not meet these
requirements?

Problem #2 A-F:
A process normally produces parts with an average diameter of .24 inches with a standard
deviation of .02 inches. Assume the distribution of the process is normal and solve the
following:
a. With sample sizes of 30, what would be the standard deviation of distribution of sample
means?
b. Using part A, if 97% of the sample means should fall within the control limits, what value for
Z should be used to calculate UCL and LCL?
c. Compute the UCL and LCL
d. With sample sizes of 100, what would be the standard deviation of the sample means?
e. Using part D, if 99% of the sample means should fall within the control limits, what value for
Z should be used to calculate UCL and LCL?
f. Compute the UCL and LCL

Problem #3 A-D:
A local distributor for a national tire company expects to sell approximately 9,600 steel-belted
radial tires of a certain size and tread design next year. Annual carrying cost is $16 per tire, and
ordering costs is $75. The distributor operates 288 days a year.
a. What is the EOQ?
b. How many times per year does the store reorder?
c. What is the length of an order cycle?
d. What is the total annual cost if the EOQ order quantity is ordered?

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Problem #4 A-C:
The maintenance department at a mall uses about 816 cases of cleanser per year. Ordering
costs are $12 and carrying costs are $4 per case. Pricing is:

Discounts:
1-49 $20/case
50-79 $18
80-99 $17
100-over $16

A. What is the common EOQ?

B. What is the total annual cost at the common EOQ?
C. Which order quantity is optimal if the intent is to minimize the total annual cost?
a. Common EOQ, 80, or 100

Problem #5:
As the manager of Nate Dogg’s Gourmet Hot Dog Stand you know that your store uses 2,000
napkins/week. If it takes 2 weeks to get a new shipment of napkins, then at what quantity of on
hand inventory should you re-order (assume safety stock is not a consideration)?

Problem #6 A-C:
A. To protect against uncertainty, a manager of a toy store has decided to keep a safety
stock of 12 new Lego police sets. Average weekly demand for the Lego sets is 35
sets/week and it takes 2 days to get a new shipment. At what quantity of on hand
inventory should the manager re-order?
Suppose that the manager of the above question wants to determine safety stock based on
a specified service level rather than arbitrarily setting it at 12 (her favorite number). The
manager knows that demand during lead time is normally distributed with a mean of 10 and
standard deviation of 2 sets. The manager wants a stockout risk of no more than 2.5%.

B. What quantity should the manager set safety stock (round up)?
C. At what quantity of on hand inventory should the manager re-order?

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Conceptual Questions:
1. What are the steps in the control process?
2. What is the natural or inherent process variations in process output called?
3. What is the inventory held in excess of average demand? What are some reasons for
holding inventory in excess of expected demand?
4. Many operations have numerous inspection points, what are the five process inspection
points discussed in class?
5. What is a control chart and why are they used?
6. Overstocking items unnecessarily ties up funds that might be productive elsewhere
(True or False)
7. Understocking items can result in missed deliveries, lost sales, and dissatisfied
customers (True or False)
8. What influence does accepting a higher stockout risk have on inventory levels? Lower
stockout risk?
9. What is a periodic system for inventory counting? Can you identify examples?
10. What is a perpetual inventory system? Can you identify examples?
11. What is the time between placing an order and receiving the order called?
12. In the basic EOQ model, if EOQ = 1,000 then total costs for that order will be at the point
where holding costs are equal to ordering costs (True or False).
13. When using EOQ, our goal is to ALWAYS find the quantity that does what?
14. EOQ tells us when to order more inventory (True or False).
15. ROP tells us how much inventory to order (True or False)
16. What is the probability that actual demand will not exceed supply during lead time?
17. In a two-bin inventory system, the amount contained in the second bin is equal to the
EOQ (True or False).
18. Retail Link is an internet based tool created by Wal-Mart, which allows suppliers to
access important product, category, market basket, and other information that is
recorded at the time of sale. Retail Link is an extremely advanced two-bin system (True
or False).
19. What are the reasons discussed in class for suppliers to offer quantity discounts?
20. What are the reasons discussed in class for vendors to purchase inventory with quantity
discounts?