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**Production & Operations Management (MDP408b) – Spring 2011 Tutorial #4: Economic order quantity model
**

Problems to be solved by students in class with guidance from the TA: 2, 4 Problems to be solved by the TA in class: 1 Problems to be solved by students and submitted next week: 3, 5

1) Glue is consumed in a wood workshop at a fairly steady rate of 50 cans per week. Each can of glue costs LE10.00. It costs the workshop LE2.00 to make an order, and the inventory holding cost is evaluated based on an annual interest (cost of capital) of 12%. [Assume 50 weeks per year] a) Determine the optimal number of cans of glue to order and the time between placements of orders. b) Based on the order quantity calculated in (a), what is the total annual holding and ordering cost for this item? c) If the consumption rate of glue is found to be 40 cans per week instead of 50, what would be the total annual cost if the order quantity calculated in (a) is used? By how much does this total annual cost differ from the optimal value if the correct consumption rate of 40 is used? What do you conclude from that?

2) Given the following data: A = LE100, i = 0.25 /year, D = 24,000 units/year, and c0 = LE100 a) Derive an implicit equation for the optimal order quantity if the value of the product varies with the quantity as c = c0 + b Q b) Estimate the EOQ from the equation using b = -0.0003 c) How does your estimate compare to the EOQ that assumes b = 0? Why?

3) The CU Bookstore sells 300 notebooks per year. Each notebook carries a variable cost of LE0.50, while the fixed cost to restock the shelves amounts to LE4.00. Assume the cost of capital is 8%. a) Calculate the Economic Order Quantity (EOQ) b) Calculate the Total Cost (TRC) associated with the EOQ calculated in part (a). c) Calculate the best order quantity now, considering a 40% discount on orders greater than 300. d) Assume that a particular notebook occupies 0.10 cubic foot of space, for which the bookstore figures it costs them LE2 per term per cubic foot. Calculate the best replenishment quantity under these circumstances. e) Now assume that unit cost of the same notebook increases from LE0.50 to LE0.60. Calculate the new EOQ.

4) A retailer sells about 5,000 units per year of a particular item. The following data have been found for this item: A = LE100 c = LE2.00 per unit i = 0.28 LE/LE/year The retailer is now using an order quantity of 500 units. A keen analyst observes that savings could be realized by instead using the EOQ.

a) What is the EOQ? b) How much will the retailer save per year if he uses the EOQ instead of ordering 500 units? c) If the retailer is given an option of reducing the set up cost to $25 for a fixed charge of $300 per year, should he take the option if (1) He orders 500 units and (2) He orders EOQ 5) A bakery, which supplies a large number of retail outlets, uses bulk flour at a rate of 2,000 Kg per working day. When the bakery places an order for bulk flour, it is delivered at a rate of 8,000 Kg per (working) day after a lead-time of 5 (working) days. The cost of placing, receiving and handling an order for bulk flour is LE48.00. The holding cost is estimated to be LE0.30 per Kg per year. a) Convert the holding cost to a cost per pound per working day, assuming there are 300 working days. b) Determine the optimal lot size. c) Determine the resultant (1) Maximum inventory (2) Average inventory (3) Average annual holding cost (4) Interval between orders (5) Reorder point d) Repeat part (b) when the lot size is constrained by the fact that flour spoils after 7 days. (Hint: Watch out for weekends! Five working days per week.)

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