OM 2 – Practice Problems on Inventory Management

Q.1: A fashion retailer in Santa Barbara, California sells a new designer dress at the
company’s boutique store for $10,000 a piece. Demand at the boutique is limited due to the
short time the dress remains fashionable and is estimated to be normal with mean 70 and
standard deviation 40. There were only 100 dresses produced to maintain exclusivity and
high price. It is the company’s policy that all unsold merchandise is destroyed.

a. How many dresses remain unsold on average at the end of the season? (Ans: 35.248)
b. What is the retailer’s expected revenue? (Ans: $647,520)

Q2: CoolApparel is a manufacturer of ski apparel. A ski jacket is sourced at a cost of $80 and
sold for $125. One order is placed at the beginning of the season. Currently, CoolApparel
disposes of any unsold jackets at the end of the season to outlet stores at $70. It costs $10 to
hold a jacket in inventory for the entire season and then ship it to an outlet store. Demand for
ski jackets has been forecast to be normally distributed, with a mean of 4,000 and a standard
deviation of 1,750.

a. How many jackets should CoolApparel order for the season assuming a single order?
(Ans: 4,879)
b. What is the expected profit from this policy? (Ans: $140,001)
c. What is the expected overstock at the end of the season that will be sent to outlet
stores? (Ans: 1,224)
d. CoolApparel is considering an alternative under which it will ship surplus jackets at
the end of the season for sale in the Southern Hemisphere. Inclusive of all costs, the
salvage value is expected to increase to $75 under this option. How will this change
affect the quantity ordered, expected profits, and expected overstock to be sent to the
Southern Hemisphere? (Answers: Optimal lot-size = 6,243, Expected profits =
$164,644, Expected overstock = 2,326)

Q.3: Disk Drives Inc. (DDI) produces a line of internal disk drives for computers. The drives
use a 3.5-inch platter that DDI purchases from an outside supplier. Demand data and sales
forecasts indicate that the weekly demand for the platters is closely approximated by a normal
distribution with mean 38 and variance 130. The platters require a three-week lead time for
delivery. DDI has been using a 40% annual interest charge to compute holding costs. The
platters cost $18.80 each, and the order cost is $75.00 per order. The president of DDI
decides to use a 99% fill rate criterion. Under this criterion, and with an order size equal to
the EOQ, what will be the reorder point? (Ans: ROP = 132)