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Assignment in Inventory Management

1. List various components of the following costs:

a) Ordering cost, b) Inventory carrying cost, and c) Shortage cost . Explain how to estimate these
costs in a typical manufacturing organization.

2. Past sales data is shown below for an item, sold by Excel Ltd. The item is showing a declining trend.
Forecast the requirement for next 2 periods:
Period 1 2 3 4 5
Sales (in Monetary 350 275 250 20 175
units) 0
How the above information can be used in managing materials.

3. Assume the following data for an item, XY1:

Unit price = Rs 200, ordering cost = Rs 1000, Annual Demand= 5000 units and inventory carrying
rate = 20 %.
a) If the minimum order size is 250 units, what should be the EOQ? Derive necessary formula for this.
b) What is the added cost if the firm orders 400 units or 600 units at a time rather than the EOQ?.
c) Suppose the firm could receive a discount of 1% on orders of 1,000
or more. Should the firm take the discount?

4. New Enterprise Ltd (NEL) uses 1,000 electric drills per year in their production process. The ordering
cost for these is Mu 100 per order and the carrying cost is assumed to be 40% of the per unit cost. In
orders of less than 120, drills cost Mu 78 per unit; for orders of 120 or more the cost drops to Mu 50
per unit. Should we take advantage of the quantity discount?

5. Excel manufactures an industrial component used in automobile industry. The unit is in Gurgaon.
Below is a partial information from the annual balance sheet and income statement of Excel Ltd for 2
years.
Balance sheet (all figures in Rs ‘000) of Excel Ltd.
This year Last year
Total assets 31,550 29,000
Total Inventory 5,500 6,500
WIP alone 1,250 1,750
Income statement (all figures in Rs. ‘000) of Excel Ltd.
This year Last year
Sales 52,000 50,000
Cost of Goods sold 36,000 out of which direct labor 35,000 out of which direct labor and
and manufacturing overheads = manufacturing overheads = 20,125,
21,000, direct materials = 15,500 , direct materials = 15,125 , and change in
and change in WIP = Rs -500 WIP = Rs -250

Gross margin 16,000 15,000

Operating expenses 12,860 13,860
Operating income 3,140 2,000
Interest expenses 640 550
Income 2,500 1,450
Taxes @ 30 % 750 435
Net income 1,750 1,015
Excel has 200 employees compared to 190 last year. This year it has sold 60,000 units compared to 55,00
units last year.
Analyze the performance of Excel in as much detail as possible from Materials Management point of view.
Based on this, offer suitable advice to Excel.

6. Derive the EOQ formula with usual notations and shortage cost as K (Mu per unit)

7. Suppose that Annual Demand = 5000, Set Up cost = Rs.150/setup and item cost is Rs.15. If we require
five set-ups in the year, what is implied annual holding cost rate? For the above case, assume inventory
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holding rate as 10%. We are asked to revise this rate to 35%. What will happen to EOQ? What
implications it will have on total cost?

8. Excel produces fire extinguishers. It makes 30,000 of these fire extinguishers per year. Each
extinguisher requires one handle (assume a 300-day work year for daily usage rate purposes). Assume
an annual carrying cost of Mu 1.50 per handle, production setup cost of Mu 150, and a daily production
rate of 300. What is the optimal production order quantity? (Mu=Monetary Unit)

9. New Enterprise Ltd (NEL) uses 1,000 electric drills per year in their production process. The
ordering cost for these is Mu 100 per order and the carrying cost is 40%. In orders of less than 120, drills
cost Mu 78 per unit; for orders of 120 or more the cost drops to Mu 50 per unit. Should we take advantage
of the quantity discount?

10. At a centralized warehouse, Clock Radio inventory levels have been excessive lately. It has been
suggested that a simple Fixed Order Quantity system would be useful to better control its inventory.
The lead time for the item is a constant of 3 weeks. Annual demand for the radio is 20,800 units,
holding cost is MU 3/unit/year, and ordering cost is MU 50. Demand for the product is non-seasonal
with a mean of 400 units per week. Find the following: a) Reorder point, b) EOQ; and c) average
inventory and total cost if the order quantity is 2100 units.

11. Assume you have a product with the following parameters: Annual Demand = 360 units; Holding cost
per year = Mu 1.00 per unit; Order cost = Mu 100 per order. What is the EOQ for this product?
Assuming a 300-day work year, how many orders should be processed per year? What is the expected
time between orders? What is the total cost for the inventory policy?
What would cost be if the demand was actually higher than estimated (i.e., 500 units instead of 360
units), but the EOQ established in earlier case is used? What will be the actual annual total cost?

12. The annual demand for an item is 2000 units, each order costs Mu 10 and the annual holding cost is
40 % of unit cost. The unit cost depends on the quantity ordered as follows:
Mu 1 for order quantities less than 500 units
Mu 0.80 for order quantities between 500 and 999 units
Mu 0.60 for order quantities more than 1000 units
What is the optimal order quantity?

13. During a 50-week year, P&G notice that demand for one of its products is constant at 10 units a week.
The cost of placing an order is Mu 150. The company aims at 20 % annual rate of return on its assets.
The supplier of the item quotes a basic price of Mu 250 per unit. He offers a discount of 10 % on orders
of 50 units or more, 15 % for orders more than 150 units or more, and 20 % on orders of 500 units or
more. What is the optimal order size for P&G?

14. Demand for an item is constant at 1800 units a year. The item can be made at a constant rate of 3500
units a year. Unit cost is Mu 50, Set-up cost is Mu 650, and holding rate is 30 % . What is the optimal
batch size for the item? If production set-up is 2 weeks, when should this be started?

15. CML currently has sales of Mu 20 Million a year, with a stock level of 25 % of sales. Annual holding
cost for the stocks is 20 % of value. Operating costs (excluding the cost for the stock) are Mu 15 Million
a year. The other assets of CML are valued at Mu 30 Million. What is the current return on assets?
How does this change if stock levels are reduced to 20 % of sales?
What are the limits for such reduction in stocks?

16. Draw the flow chart for the logic of an inventory system where inventory is reviewed after a Fixed
Period of let us say 1 week, 1 month etc.

17. Draw the logic flow chart for deciding the quantity based on discount with 3 price ranges. Assume
your own notation scheme.
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18. Eureka Ltd (EL) records the following monthly purchases and sales of an item. If there was no
opening stock, what is the value of the stock at the end of the period? What is the profit and profit margin
if each unit is sold for Mu 35?
Month Units Bought Cost of each unit Units Sold
(Mu)
Jan 110 22 73
Feb 60 26 71
Mar 70 30 49
Apr 50 28 53
May 80 24 37
Jun 40 32 71
State all your assumptions very clearly.

19. Emergent Wholesalers Ltd (EWL) buys an item for Mu 100 a unit and sales it for Mu 150. Annual
sales of the item are 1000 units with an average inventory of 150 units. Each unit held in stock costs
approximately 25 %. Compute inventory turnover ratio and list the benefits if the average stocks of the
item are reduced to 100 units without affecting customer service?

20. Excel work a 50-week year and stock an electric item with the following data:
Demand= 20 a week, Ordering cost = 50, Holding cost = Mu 660 a unit a year.
Find the EOQ. Would it make much difference if this EOQ were rounded up or down to the nearest integer?

21. Electra has a standing order of 40 units of an item every month. What can you infer about the ordering
and holding costs? If the ordering cost is Mu 160, what is the implied holding cost? Make necessary
assumptions

22. Demand for an item is 100 units a month. Unit cost is Mu 50 , ordering cost is Mu 50, holding rate is
25 % , shortage cost is 40 % of item cost. Find the optimal ordering policy for the item.

23. BCL is concerned with the storage space occupied by three items that have the following
characteristics:
Item Units cost (Mu) Annual Demand (in units) Space per item (m3)
1 100 500 1
2 200 400 2
3 300 200 3
The ordering cost is Mu 1000 and holding rate is 20 %. If BCL wants to allocate an average space of
300 cubic meters to these items, what would be the beat ordering policy?

24. Apex Ltd is concerned with the stock of three items that have the following characteristics:
Item Units cost (Mu) Annual Demand (in units)
X 100 100
Y 60 300
Z 40 200
The ordering cost is Mu 100 and holding rate is 20 %. If Apex wants to limit average investment in
these items to Mu 4000, , what would be the beat ordering policy?

25. Demand for an item over the past 6 mo0nths has been 10, 80, 240, 130, 100 and 40 units
respectively. The ordering cost is Mu 50 and the holding cost is Mu 1 a unit a month an dany orders placed
in one month become available in the following month. How good is an ordering policy based on average
values?

26. Whether Accessories Ltd (WAL) are about to place an order for industrial heaters for a forecast
spell of cold weather. They pay Mu 1000 for each heater, and during the cold spell sell them for Mu 2000.
demand for heaters declines markedly after a cold spell, and any unsold units are sold at Mu 500. Previous
experience suggests the likely demand for heaters as follows:
Demand 1 2 3 4 5
Probability 0.2 0.3 0.3 0.1 0.1
How many heaters should WAL buy?
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27. In recent years, the demand for a seasonal product has had the following pattern:
Demand 1 2 3 4 5 6 7 8
Probability 0.05 0.10 0.15 0.20 0.20 0.15 0.10 0.05
It costs Mu 80 to buy each unit and the selling price is Mu 120 . How many units would you buy for
the season? What is the expected profit? Would your decision change if the salvage value is Mu 20?

28. Draw the flow chart for the logic of an inventory system where inventory is reviewed after a Fixed
Period and the Demand is stochastic with uniform distribution