Homework #8

1) HAL Ltd. produces a line of high-capacity disk drives for mainframe computers. The
housings for the drives are produced in Hamilton, Ontario, and shipped to the main plant
in Toronto. HAL uses the drive housings at a fairly steady rate of 720 per year. Suppose
that the housings are shipped in trucks that can hold 40 housings at one time. It is
estimated that the fixed cost of loading the housings onto the truck and unloading them
on the other end is $300 for shipments of 120 or fewer housings (i.e., three or fewer
truckloads). Each trip made by a single truck costs the company $160 in driver time,
gasoline, oil, insurance, and wear and tear on the truck.
A. Compute the annual costs of transportation and loading and unloading the housings
for the following policies:
(1) Shipping one truck per week,
Supply per week = 720/52 = 13.85 = 14 housing per week
Cost per week = (300+160) * 52 = $23,920
(2) Shipping one full truckload as often as needed
No. of shipments needed = 720/40 = 18
Total Cost = (300+160) * 18 = $8,280
(3) Shipping three full truckloads as often as needed.
Number of shipment = 720 / (40*3) = 6
Total Cost = 6 * 300 + 6 * 3 * 160 = $4,680

B. For what reasons might the policy in (a) with the highest annual cost be more
desirable from a systems point of view than the policy having the lowest annual cost?

When requirement of houses is on a continuous basis of every week, policy 1 is

recommended. In case the demand need to be fulfilled on an uninterrupted basis then
weekly supply policy should be undertaken irrespective of the cost structure.

2) David’s Delicatessen flies in Hebrew National salamis regularly to satisfy a growing

demand for the salamis in Silicon Valley. The owner, David Gold, estimates that the
demand for the salamis is pretty steady at 175 per month. The salamis cost Gold $1.85
each. The fixed cost of calling his brother in New York and having the salamis flown in
is $200. It takes three weeks to receive an order. Gold’s accountant, Irving Wu,
recommends an annual cost of capital of 22 percent, a cost of shelf space of 3 percent of
the value of the item, and a cost of 2 percent of the value for taxes and insurance.

a) How many salamis should Gold have flown in and how often should he order them?

Total demand per year = 175 * 12 = 2100

Holding cost = (22% + 3% + 2%) * $1.85 = $ 0.4995

 We have,
2𝜆𝐾 2 ∗ 2100 ∗ 200
𝑄∗ = √ =√ = 𝟏, 𝟐𝟗𝟕 𝒖𝒏𝒊𝒕𝒔
ℎ 0.4995
𝑄∗ 1297
𝐶𝑦𝑐𝑙𝑒 𝑡𝑖𝑚𝑒 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 = = = 0.61 𝑦𝑒𝑎𝑟𝑠 = 𝟕. 𝟒 𝒎𝒐𝒏𝒕𝒉𝒔
𝐷 2100

b) How many salamis should Gold have on hand when he phones his brother to send
another shipment?

Re-order point =  * L = 2100 * 3/52 = 121.15 = 121 units

c) Suppose that the salamis sell for $3 each. Are these salamis a profitable item for
Gold? If so, what annual profit can he expect to realize from this item? (Assume that
he operates the system optimally.)

Profit = revenue – cost

Total revenue = 2100 *3 = $6,300

Production cost = $1.85 * 2100 = $3,885
Holding cost = 27% of production cost = 0.27 * $3,885 = $1,048.89
Setup Cost = fixed cost / cycle time = 200/0.61 = $324.32

Total Profit = $6,300 – (3,885 +1048.89 + 324.32) = $1,041.73

d) If the salamis have a shelf life of 4 weeks, what is the trouble with the policy that you
derived in part (a)? What policy would he have to use in that case? Is the item still
profitable?

4
𝑄∗ = 𝑇 ∗ 𝜆 = ∗ 2100 = 162 𝑖𝑡𝑒𝑚𝑠
52

Production Cost = $1.85 * 2100 = 3885

Ordering cost = 2100/162 * 200 = 2600
Holding cost = 1048.89

Profit = 6,300 – (3885 + 2600 + 1048.89) = -$1233.89

Thus as the units of order decreases to 162 units and the number of orders in a year
increases. The firm is likely to go under losses. More number of orders will increase
the total cost without any change in the total revenue. Hence, it will not be profitable
when the life of salamis is 4 weeks.
3) Filter Systems produces air filters for domestic and foreign cars. One filter, part number
JJ39877, is supplied on an exclusive contract basis to Oil Changers at a constant 200
units monthly. Filter Systems can produce this filter at a rate of 50 per hour. Setup time to
change the settings on the equipment is 1.5 hours. Worker time (including overhead) is
charged at the rate of $55 per hour and plant idle time during setups is estimated to cost
the firm $100 per hour in lost profit. Filter Systems has established a 22 percent annual
interest charge for determining holding cost. Each filter costs the company $2.50 to
produce; they are sold for $5.50 each to Oil Changers. Assume 6-hour days, 20 working
days per month, and 12 months per year for your calculations.

a) How many JJ39877 filters should Filter Systems produce in each production run of this
particular part to minimize annual holding and setup costs?

Here,

 = 200 * 12 = 2400 units per year

Production capacity (P) = 50 *6 *20* 12 = 72,000 units per year
Holding Cost = 0.22*2.50 = $0.55
2𝐾 𝑝 + ℎ 2 ∗ 2400 ∗ (100 + 55) ∗ 1.5 72000 − 2400
𝑄= √ √ =√ √ = 𝟏, 𝟒𝟒𝟗 𝒖𝒏𝒊𝒕𝒔
ℎ 𝑝 0.55 72000

b) Assuming that it produces the optimal number of filters in each run, what is the
maximum level of on-hand inventory of these filters that the firm has at any point in
time?

𝜆
𝐼 = 𝑄∗ ∗ (1 − )
𝑃
2400
𝐼 = 1449 ∗ (1 − ) = 𝟏, 𝟒𝟎𝟎. 𝟕 𝒖𝒏𝒊𝒕𝒔
72000

c) What percentage of the working time does the company produce these particular filters,
assuming that the policy in part (a) is used?

𝑄∗ 1449
𝐶𝑦𝑐𝑙𝑒 𝑡𝑖𝑚𝑒 = = = 0.60375 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
𝜆 2400
1449
𝑈𝑝𝑡𝑖𝑚𝑒 = = 0.0201
72000
𝑈𝑝𝑡𝑖𝑚𝑒 0.0201
𝑃𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓𝑢𝑝𝑡𝑖𝑚𝑒 = = = 0.033 = 𝟑. 𝟑%
𝐶𝑦𝑐𝑙𝑒 𝑇𝑖𝑚𝑒 0.60375
4) A purchasing agent for a particular type of silicon wafer used in the production of
semiconductors must decide among three sources. Source A sell the silicon wafers for
$2.50 per wafer, independently of the number of wafers ordered. Source B will sell the
wafers for $2.40 each but will not consider an order for fewer than 3,000 wafers, and
source C will sell the wafers for $2.30 each but will not accept an order fewer than 4,000
wafers. Assume an order setup cost of $100 and an annual requirement of 20,000 wafers.
Assume a 20 percent annual interest rate for holding cost calculations.

a) Which source should be used, and what is the amount of the optimal order?

2𝜆𝐾 2 ∗ 100 ∗ 20000

𝑄𝐴 = √ = √ = √8,000,000 = 2828 𝑢𝑛𝑖𝑡𝑠
ℎ 0.20 ∗ 2.5

2𝜆𝐾 2∗100∗20000
𝑄𝐵 = √ = √ = √8,333,333 = 2887 𝑢𝑛𝑖𝑡𝑠
ℎ 0.20∗2.4
𝟐∗𝟏𝟎𝟎∗𝟐𝟎,𝟎𝟎𝟎
𝑸𝑪 = √ = √𝟖𝟔𝟗𝟓𝟔𝟓𝟐 = 𝟐, 𝟗𝟒𝟗 𝒖𝒏𝒊𝒕𝒔 (but less than 4000)
𝟎.𝟐∗𝟐.𝟑

𝑘 𝑄
𝐺(𝑄) = 𝜆𝑐𝑖 + 𝜆 ∗ + 𝐼𝑐𝑖
𝑄 2

20,000 ∗ 100 0.2 ∗ 2.5 ∗ 2828

𝐺𝐴 (𝑄) = 20,000 ∗ 2.5 + + = $51,414
2828 2

20,000 ∗ 100 0.2 ∗ 2.3 ∗ 3000

𝐺𝐵 (𝑄) = 20,000 ∗ 2.4 + + = $49,387
3000 2
𝟐𝟎, 𝟎𝟎𝟎 ∗ 𝟏𝟎𝟎 𝟎. 𝟐 ∗ 𝟐. 𝟒 ∗ 𝟒𝟎𝟎𝟎
𝑮𝑪 (𝑸) = 𝟐𝟎, 𝟎𝟎𝟎 ∗ 𝟐. 𝟑 + + = $𝟒𝟕, 𝟒𝟐𝟎
𝟒𝟎𝟎𝟎 𝟐

thus, the minimum cost is of $47,420 when the order is placed from source C
with the optimal order size of 4000 units.

b) What is the optimal value of the holding and setup costs for wafers when the optimal
source is used?
𝑘 𝑄 100 4000
Holding Cost and setup cost = 𝜆 + 𝐼𝑐𝑖 = 20,000 ∗ + 0.2 ∗ = $𝟗𝟎𝟎
𝑄 2 4000 2
c) If the replenishment lead time for wafers is three months, determine the reorder point
based on the on-hand level of inventory of wafers.

𝑄∗ 4000
𝐶𝑦𝑐𝑙𝑒 𝑡𝑖𝑚𝑒 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 = = = 2.4 per month
𝜆 20000
𝜏 3
𝑅𝑎𝑡𝑖𝑜 = = = 1.25 months
𝑇 2.4
1
3 𝑚𝑜𝑛𝑡ℎ𝑠 ∗
𝐶𝑦𝑐𝑙𝑒 = 12 = 0.25 = 0.05
5 5
𝑅𝑒𝑜𝑟𝑑𝑒𝑟 𝑝𝑜𝑖𝑛𝑡 = 𝜆 ∗ 𝜏 = 1,000 𝑢𝑛𝑖𝑡𝑠