5.1. Bell Technologies stocks and sells its own brand of laptop computers.

It costs the firm $543

each time it places an order with the manufacturer for laptops. The cost of carrying one laptop
in inventory for a year is $210. The store manager estimates that total annual demand for the
computers will be 1,800 units with a constant demand rate throughout the year. Bell’s policy is
never to have stockouts of the store-brand laptop. The store is open for business seven days per
week from 9 a.m. to 6 p.m. Determine the following:

a. Optimal order quantity per order

b. Minimum total annual inventory costs

c. The number of orders per year

d. The time between orders (in working days)

5.2. Bell assumed with certainty that the ordering cost is $543 per order and the inventory
carrying cost is $210 per unit per year. However, the inventory model parameters are frequently
only estimates that are subject to some degree of uncertainty. Consider three cases of variation
in the model parameters as follows:

(a) both ordering cost and carrying cost are as originally estimated;

(b) both ordering cost and carrying cost are 20 percent less than originally estimated;

(c) both ordering cost and carrying cost are 20 percent higher than originally estimated;

(d) ordering cost is 20 percent higher and carrying cost is 20 percent lower than originally
estimated. Discuss your findings.

5.3. Premier Golf Shop operates 300 days per year. The shop pays $300 for a particular beginner
golf club set purchased from a local manufacturer. The annual holding cost per club set is
estimated to be 25 percent of the dollar of the inventory. The shop sells an average of 20 per
week. The ordering cost for each order is $50. Determine the optimal order quantity and the
total minimum cost.

5.4. Mitch’s body shop uses a highly flammable solvent. It must have the product delivered by
special cargo trucks designed for the safe shipment of chemicals. The delivery cost for the
solvent is $1,200 each time an order is placed. The solvent is packaged in one-gallon plastic
containers. The cost of holding the chemical in storage is $120 per gallon per year. The annual
demand for the chemical, which is constant over time, is 1,783 gallons per year. The lead time
from time of order placement until receipt is 14 days. The company operates 250 working days
per year. Compute the optimal order quantity, total minimum inventory cost, and reorder point.
5.5. The Buckeye Carryout store stocks Scarlet and Grey (S&G) beer mugs. Demand for S&G is
10,200 per year. It costs $120 per order of mugs, and it costs $1.35 per mugper year to keep the
mugs in stock. Once an order for mugs is placed, it takes seven days to receive the order from
the distributor. Determine the following:

a. Optimal order size

b. Minimum total annual inventory cost

c. Reorder point

5.6. The Apple Valley Company makes apple butter to supply to local street vendors in
Monterey, California. Apple Valley can make 330 pounds of apple butter per day, and demand
from the street vendors is 190 pounds per day. Each time Apple Valley makes apple butter, it
costs $176 to set up the production process. The annual cost of carrying a pound of apples in a
refrigerated storage area is $6.50. Determine the optimal order size and the minimum total
annual inventory cost.

5.7. The Scarlet and Grey Brewery produces Buckeye Light Beer, which it stores in barrels in its
warehouse and supplies to its distributors on demand. The demand for Buckeye Light is 36,000
barrels of beer per day. The brewery can produce 3,000 barrels of Buckeye Light per day. It is
stored in a refrigerated warehouse at an annual cost of $80 per barrel. Determine the economic
ordering quantity and the minimum total annual inventory cost.

5.8. The purchasing manager for Worthington Industries must determine a policy for ordering
boring drills to operate five horizontal boring machines. Each machine requires exactly 30
boring drills per day to operate, and the firm operates 360 days per year. The purchasing
manager has determined that the ordering cost is $80 per order, and the cost of holding the
drills is 25 percent of the average dollar value of the inventory held. The purchasing manager
has negotiated a contract to obtain boring drills for $165 per drill for the coming year.

a. Determine the optimal quantity of boring drills to receive in each order.

b. Determine the total inventory-related costs associated with the optimal ordering policy.

c. If five days’ lead time is required to receive an order of drills, how many drills should be on
hand when the order is placed?

5.9. The SBX Bookstore at The Ohio State University purchases from a vendor jackets
emblazoned with the Ohio State logo. The vendor sells the jackets to the store for $43 dollars
per jacket. The cost to the bookstore for placing an order is $150, and the annual carrying cost is
22 percent of the cost of a jacket. The bookstore manager estimates that 2,500 jackets will be
sold during the year. The vendor has offered the bookstore the following all unit volume iscount
schedule:

Order Size Discount

1–299 0%

300–499 2

500–799 4

800+ 5

The purchasing manager wants to determine the bookstore’s optimal order quantity, given this
quantity discount information.

5.10. Determine the optimal order quantity of jackets and total annual cost in exercise 5.9 if the
carrying cost is a constant $13 per jacket per year.

5.11. The purchasing manager for Medco Research Laboratory orders letterhead forms and
stationery from an office products firm in boxes of 500 sheets. The company uses 5,000 boxes
per year. Annual carrying costs are $4.50 per box, and ordering costs are $34. The following all
unit discount price schedule is provided by the office supply company:

Order Quantity (boxes) Price per Box

200–999 $13

1,000–2,999 12

3,000–4,999 11

5,000+ 10

Determine the optimal order quantity and the total annual inventory cost.

5.12. Lee’s Machine Shop has estimated net requirements for a particular part as follows:

Month 1 2 3 4 5 6 7 8 9 10 11
12

Requirements 200 20 30 40 140 500 500 500 500 80 0

200

Ordering cost associated with this part is $600. Estimated inventory carrying cost is $4 per unit
per month calculated on average inventory. Currently, no parts are available in inventory. The
company wishes to know when and how much to order over the next 12 months.
a. Apply the economic order quantity and the part-period balancing procedures to solve this
problem.

b. What important assumptions are involved in each of the approaches used in part a?

5.13. The Beam Brake Company is trying to decide which of several lot-sizing procedures to use
for its MRP system. The following information pertains to one of the typical component parts:

Setup cost = $50/order

Inventory cost = $0.75/unit/week

Current inventory balance = 10 units

Week 1 2 3 4 5 6 7 8

Demand Forecast 55 35 25 0 105 15 75 10

a. Apply the EOQ, POQ, and LUC lot-sizing procedures and show the total cost resulting from
each procedure. Calculate inventory carrying costs on the basis of average inventory values.
Assume orders are received into the beginning inventory.

b. Indicate advantages and disadvantages of using each procedure in part a.

5.14. Apply the McLaren order moment (MOM) lot-sizing procedures to the following 12
periods of requirements data, indicating order receipts’ size and period. Assume order costs are
$150 per order placed and $2 inventory carrying costs on the basis of ending inventory values.
Calculate inventory carrying costs.

5.15. The following table contains figures on the annual volume and unit costs for a random
sample of 10 items from a list of 2,000 inventory items at a health care facility. Please develop
an ABC analysis for these items. Also, draw an ABC diagram reflecting your results. How could
the purchasing manager use this information?
5.16. The purchasing manager for Omni Enterprises requested the following data from the
accounting department:

Annual demand = 15,500

Cost of placing an order = $180

Annual inventory holding costs = 20 percent

Unit cost = $75

a. Please calculate the following:

i. The optimal order quantity.

ii. The average number of orders.

iii. The total annual inventory costs.

b. Suppose that Omni has been arbitrarily ordering 50 times per year. What is the total annual
inventory cost?

c. Assume that Omni incorrectly estimates the order cost to be $250 per order. What order
quantity will Omni use? What actual annual inventory costs will be incurred?

5.17. Assume Omni’s demand for an item during the lead time is normally distributed with a
mean of 5,000 and a standard deviation of 50. What reorder point should be used in order to
average no more than one stockout every 20 reorder cycles? If safety stock is 70, how often will
a stockout occur during a reorder cycle?

5.18. Daltrey Systems is now offering Omni quantity discounts of 5 percent on orders over 1,500
units and 10 percent on orders over 6,000 units. Omni currently orders 1,000 units five times a
year to meet annual demand. Omni’s current purchase cost is $3.00 and the selling price is
$4.95 per unit. The order cost is $42 per order. The annual inventory holding cost is 25 percent.
Based on the new discount policy, what is the best strategy for the purchasing manager to
follow?