Assignment 1 (BBA & BBIS) SUB: OM

Inventory management
1. Nepal soft drink Co. has a soft drink product which has a constant annual demand rate of
3000 cases and cost Rs. 200/case. If ordering cost are Rs. 20 and inventory holding cost
are charged at 25%, what is the EOQ for this product? Also determine the cycle time (in
days). Show the result graphically. Ans: EOQ= 49 cases & Cycle time = 6 days.
2. A manufacturing organization experienced constant annual demand of 10,000 units of an
item which cost Rs. 40 per unit. If the order cost is Rs. 20 per order and the holding cost
is 25% of the item costs. Determine the economic order quantity and the reorder level
with no lead-time known. Assuming number of working days in a year is 250 days. Ans:
EOQ = 200 units & ROL = 40 L, L= Lead time
3. Explain the ABC analysis as inventory management technique. An aircraft company uses
rivets at an approximate rate of 2500 kg per year. The rivets cost Rs. 30 per kg and the
company personnel estimates that it costs Rs. 1.30 to place an order and the inventory
carrying costs is 10% per year. How frequently should orders for rivets be placed and
what quantities should be ordered? Ans: EOQ= 46.55 units & N= 54 times
4. A local distributer for a nation tire company expects to sell approximately 9600 steel
belted radial tires of a certain size and tread design next year. Annual carrying cost is $16
per tire and order cost is $75. The distributer operates 288 days a year. Find:
a. What is the EOQ? Ans: 300 tires
b. How many times per year does the store reorder? Ans: 32 orders per year
c. What is the length of an order cycle? Ans: 9 days
d. What is the total annual variable cost if the EOQ quantity is ordered? Ans: Rs. 4800
5. What is ABC inventory planning system? Suppose Nepal distillery has a product that has
a constant annual demand rate of 3600 cases. A case of the product cost Rs. 100. If
ordering cost is Rs. 32 & inventory holding cost is Rs. 25% of the product cost. The
distributer operates 360 days a year. Find the EOQ & Cycle time in days. Ans: 30.36
cases & 3.036 days.
6. Define inventory. What are the various types of inventory? Apply EOQ model to the
following quantity discount situation in which D = 500 units per year, Ordering cost per
year = $ 40, the annual holding costs rate is 20%. What order quantity do you
recommend?

Discount Category Order size Discount (%) Unit cost

1 0 to 99 0 $10
2 100 or more 3 $9.70
Ans: Min. total cost =$5130.7 with order quantity 143 units.
7. The maintenance department of large hospital uses about 816 cases of liquid cleanses
annually. Ordering cost is $12, carrying cost is $4 per case a year, and the new price
schedule indicates that orders of less than 50 cases will cost $20 per case, 50 to 79 cases
will cost $18 per case, 80 to 99 cases will cost $17 per case and larger orders will costs
$16 per case. Determine the optimal order quantity and the total cost.
Ans: Q optimal = 99 units with Total cost Rs. $ 16322.91
8. 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
concession in order to attract larger orders. The price structure is shown below:
a) What is the optimal order quantity and the minimum cost for bell computers to order,
purchase and hold these integrated chips?
Rich Blue Chips price structure

Quantity Purchased Price/unit

1-99 units $350
100-199 units $325
200 or more units $300
b) Bells computers wishes to use 10% holding cost rather than fixed $35 holding cost in
part a) what the order quantity is and what is the optimal cost?
9. A hardware store procures and sells hardware goods. Data for an item are given below:
Expected sales per year 2500 units
ordering cost per year Rs.12.50
Holding cost 25% of average yearly inventory
Number of working days per year 250
Lead time 3 days
The item can be bought according to any of the three prices and the price schedule is:
Lot size (units) Price per unit (in Rs.)
1 to 259 4.00
260 to 999 3.00
1000 & above 2.00
Daily demand can be considered a constant value. Determine the inventory policy that
will yield the minimum total inventory cost.
10. Following discount offer is given for a product:
Cost per unit = Rs. 5
Ordering cost per order = Rs. 49
Carrying cost per year = 20%
Annual Requirement = 5000 units per year
 Order quantity (in units) Discount
0-999 0
1000-2499 10%
2500 & above 20%
Find the most economic lot size.
11. Joe Henary’s machine shop uses 25000 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 2500
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 above 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)?
12. Based on available information, lead time demand for PC jump drives averages 50 units
(normally distributed), with a standard deviation of 5 drives. Management wants a 97%
service level.
a) What is the value of Z should be applied? Ans: 1.88
b) How many drivers should be carried as safety stock? Ans: 9.40
c) What is the appropriate reorder point? Ans: 59.40
13. Ten items are kept in inventory by a production house are listed below. Find which items
should be classified as A. B and C? What % of items in each class, what % of total
annual value in each class?
Item Unit cost (Rs.) Usage
1 5 7,000
2 3 24,000
3 10 15,000
4 22 6,00
5 1.5 38,000
6 0.2 60,000
7 8 300
8 0.4 29,000
9 7.1 11,500
10 6.2 4,100