ADDITIONAL PROBLEMS
Attempt as many as you can
INVENTORY MANAGEMENT:
1.
The following table contains figures on the annual volume and unit costs for a random
sample of 16 items for a list of 2000 inventory items at a health care facility.
Item
Unit Cost
Usage
1
75
3
2
30
274
3
20
397
4
13
139
5
24
41
6
20
123
7
24
379
8
19
372
9
22
114
10
55
3270
11
105
594
12
55
482
13
35
198
14
40
37
15
12
215
16
20
116
Develop an ABC classification for these items.
2.
A large bakery buys flour in 25-pound bags. The bakery uses an average of 4860 bags a
year. Preparing an order and receiving a shipment of flour involves a cost of $4/order.
Annual carrying costs are $30 per bag.
a.
Determine the economic order quantity.
b.
What is the average number of bags on hand?
c.
How many orders per year will there be?
d.
Compute the total cost of ordering and carrying flour.
e.
If ordering costs were to increase by $1 per order, how much would that affect
the total annual cost?
Solution:
36 bags, 18 bags, 135, $1080, increase by $127.48
3.
A hardware store sells approximately 27,000 cans of a white paint a month. Because of
storage limitations, a lot size of 4000 cans has been used. Monthly holding cost is 18
cents per can, and reordering cost is $60 per order. The company operates an average
of 20 days a month.
a.
What penalty is the company incurring by its present order size on annual costs?
b.
The manager would prefer ordering 10 times each month but would have to
justify any change in order size. One possibility is to simplify order processing to
reduce the ordering cost (say using web orders). What ordering cost would
enable the manager to justify ordering every other day?

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Solution:
$16, $52.06
4.
(If quantity discounts have been covered in class)
A mail order house uses 18000
boxes a year. Carrying costs are 20 cents per box a year, and the ordering costs are
$32. The following price schedule applies.
Number of Boxes
Price per box
1000 to 1999
$1.25
2000 to 4999
$1.20
5000 to 9999
$1.18
10000 or more
$1.15
Determine the optimal order quantity.
Solution:
10,000 boxes
5.
Suppose the expected demand during lead time for a particular item is 300 units, with a
standard deviation of daily demand of 30 . Suppose the lead time is 4 days.
a.
What is the reorder point that provides a 1% risk of stock out during lead time?
b.
The safety stock needed to provide a 1% risk of stock out during lead time?
c.
The safety stock needed to provide a 7% risk of stock out during lead time?
Solution:
439.8, 139.8, 88.55
6.
In the above problem, if a reorder point of 275 is used, what is the probability of stock
out?
Solution:
66.15%
SIMULATION:
1.
A car rental agency has collected data on the demand for luxury-class automobiles over
the past 25 days. The data are shown below.
Daily Demand
Number of days
7
2
8
5
9
8
10
7
11
3
Total
25
Because customers drop cars at another location, the agency only has 9 cars available
currently. Assume single day rentals.

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