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Assignment 5

The document presents multiple inventory management problems involving demand, ordering costs, holding costs, and optimal stocking levels for various products. It includes calculations for Economic Order Quantity (EOQ), Reorder Point (ROP), and marginal analysis for stocking decisions. Additionally, it discusses ABC analysis for inventory classification based on spending percentages.

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8 views2 pages

Assignment 5

The document presents multiple inventory management problems involving demand, ordering costs, holding costs, and optimal stocking levels for various products. It includes calculations for Economic Order Quantity (EOQ), Reorder Point (ROP), and marginal analysis for stocking decisions. Additionally, it discusses ABC analysis for inventory classification based on spending percentages.

Uploaded by

dungbop28092005
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Problem 1

Lila Battle has determined that the annual demand for number 6 screws is 100,000 screws. Lila, who
works in her brother’s hardware store, is in charge of purchasing. She estimates that it costs $10 every
time an order is placed. This cost includes her wages, the cost of the forms used in placing the order,
and so on. Furthermore, she estimates that the cost of carrying one screw in inventory for a year is
one-half of 1 cent. Assume that the demand is constant throughout the year.
(a) How many number 6 screws should Lila order at a time if she wishes to minimize total inventory
cost?
(b) How many orders per year would be placed? What would the annual ordering cost be?
(c) What would the average inventory be? What would the annual holding cost be?

Problem 2
Barbara Bright is the purchasing agent for West Valve Company. West Valve sells industrial valves
and fluid control devices. One of the most popular valves is the Western, which has an annual demand
of 4,000 units. The cost of each valve is $90, and the inventory carrying cost is estimated to be 10%
of the cost of each valve. Barbara has made a study of the costs involved in placing an order for any
of the valves that West Valve stocks, and she has concluded that the average ordering cost is $25 per
order. Furthermore, it takes about two weeks for an order to arrive from the supplier, and during this
time, the demand per week for West valves is approximately 80.
(a) What is the EOQ?
(b) What is the ROP?
(c) Is the ROP greater than the EOQ? If so, how is this situation handled?
(d) What is the average inventory? What is the annual holding cost?
(e) How many orders per year would be placed? What is the annual ordering cost?

Problem 3:
John Lindsay sells CDs that contain 25 software packages that perform a variety of financial
functions, including net present value, internal rate of return, and other financial programs typically
used by business students majoring in finance. Depending on the quantity ordered, John offers the
following price discounts. The annual demand is 2,000 units on average. His setup cost to produce
the CDs is $250. He estimates holding costs to be 10% of the price, or about $1 per unit per year.
What is the optimal number of CDs to produce at a time?
Problem 4:
Harry’s Hardware does a brisk business during the year. During Christmas, Harry’s Hardware sells
Christmas trees for a substantial profit. Unfortunately, any trees not sold at the end of the season are
totally worthless. Thus, the number of trees that are stocked for a given season is a very important
decision. The following table reveals the demand for Christmas trees:

Harry sells trees for $80 each, but his cost is only $20.
a. Use marginal analysis to determine how many trees Harry should stock at his hardware store.
b. If the cost increased to $35 per tree and Harry continues to sell trees for $80 each, how many
trees should Harry stock?

Problem 5:
Ralph Janaro simply does not have time to analyze all of the items in his company’s inventory. As a
young manager, he has more important things to do. The following is a table of six items in inventory
along with the unit cost and the demand in units.

a. Find the total amount spent on each item during the year. What is the total investment for all of
these?
b. Find the percentage of the total investment in inventory that is spent on each item.
c. Based on the percentages in part (b), which item(s) would be classified in categories A, B, and C
using ABC analysis?
d. Which item(s) should Ralph most carefully control using quantitative techniques?

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