5.8 a) c0 = .08 - .03 = .

05
cu = .35 - .08 = .27

.27
Critical ratio = = .84375
.05 + .27

From the given distribution, we have:

Q f(Q) F(Q)

0 .05 .05
5 .10 .15
10 .10 .25
15 .20 .45
20 .25 .70
< - - - - .84375
25 .15 .85
30 .10 .95
35 .05 1.00

Since the critical ratio falls between 20 and 25 the optimal is Q = 25 bagels.

b) The answers should be close since the given distribution appears to be close to the normal.

c) µ = ∑xf(x) = (0)(.05) + (5)(.10) +...+(35)(.05) = 18

σ2 = ∑x2f(x) - µ2 = 402.5 - (18)2 = 78.5

(2)(32)(1032)
σ = .36 = 8.86

The z value corresponding to a critical ratio of .84375 is 1.01.

Hence,

Q* = σz + µ = (8.86)(1.01) + 18 = 26.95 ~ 27.

5.9 cu = .65 -.50 = .15

c0 = .50
 .15
Critical ratio = = .231
.15 + .50

The Cumulative Distribution Function of Demand is:

Quantity Sold CDF

100,000-150,000 .10
< - - - Critical Ratio = .231
150,001-200,000 .25
• •
• •
• •

Using linear interpolation, the optimal solution is:

* ⎡ .231 − .10 ⎤
Q = 50,000 + 150,000 = 193,667.
⎢⎣ .25 − .10 ⎥⎦

5.10 a) A period is three months. Holding cost per year is $500, which means that the cost for a 3-
month period is:

500/4 = $125 = c0

cu = 250 (emergency shipment cost)

250 2
Critical ratio = = = .667 ⇒ z = .44.
250 + 125 3

*
Hence Q = σz + µ = (6)(.44) + 60 = 62.64 ≈ 63 cars

b) cu = 150 Critical ratio = 150 = .5454

150 + 125
c0 = 125

*
F(Q ) = .5454 ⇒ z = .11

*
Q = σz + µ = (6)(.11) + 60 = 60.66 ~ 61 cars.
 c) This corresponds to an infinite horizon problem with lost sales. From part 3 of Appendix B at
the end of the chapter.

cu = lost profit = $3,500

c0 = holding cost = 125

Critical ratio = 3500 = .9655

3500 + 125

*
⇒ z = 1.82 which gives Q = (6)(1.82) + 60 = 70.92 ~ 71 cars.

5.11 a) X = 34.0
s2 = 204.4 (s = 14.3)

b) cu = 60 - 40 = 20
c0 = 40 - 29 = 11

Critical ratio = 20 = .6452

20 + 11

z = .37, Q* = σz + µ = (14.3)(.37) + 34 = 39.3 ≈ 39

c) #Times Relative Cum

Value Observed Freq. Freq.

10 1 .1 .1
20 1 .1 .2
30 4 .4 .6
< - - - critical ratio
= .6452
40 2 .2 .8
50 1 .1 .9
60 1 .1 1.0

*
Q ≈ 33 by linear interpolation.

d) The normal approximation is not very accurate since the order quantity it recommends is almost
20% too large.

5.12 co = 28.50 - 20.00 + (.4)(28.50) = 19.90

 cu = 150 - 28.50 = 121.50.

Critical Ratio = cu/(cu + co)

= 121.5/(121.5 + 19.9) = .86

a) Demand is assumed to be uniform from 50 to 250. We wish to find Q satisfying:

Area = 0.86

Q 250
50

From the picture it follows that

(Q - 50)/200 = .86, Q = (.86)(200) + 50 = 222.

b) In this case the demand distribution is assumed to be normal with mean 150 and standard
deviation 20. We wish to find Q to solve:

F(Q) = .86

From Table A-4 we have that z = 1.08, giving:

Q = µ + σz = 150 + (20)(1.08) = 172.

c) The uniform distribution in this case has a higher variance. The formula for the variance of a
uniform variate on (a,b) is (b-a)2/12. Substituting b = 250 and a = 50 gives a variance in
part a) of 3333. The variance in part b) is (20)2 = 400.

5.13 a) h = (1.50)(.28) = .42

K = 100
p = 12.80
λ = (280)(12) = 3360
 µ = (280)(5) = 1400
σ = 77 5 = 172.18

2Kλ (2)(100)(3360)
EOQ = Q0 = + = 1265
h .42

1 - F(R1) = Qh
=
(1265)(.42) = .0124
pλ (12.80)(3360)

z1 = 2.24, L(z1) = .0044, n(R1) = .75

2λ (2)(3360)
Q1 = [K + pn(R)] = [100 + 12.80(.75)] = 1324
h .42

1 - F(R2) = Qh (1324)(.42) = .0129

=
pλ 12.80(3360)

z2 = 2.23 L(z2) = .004486 n(R2) = .77

2(3360)
Q2 = [100 + 12.80(.77)] = 1326
.42

Close enough to stop.

z = 2.23, R = σz + µ = (172.18)(2.23) + 1400 =1784

Optimal (Q,R) = (1326,1784)

Kλ ⎡ Q ⎤ pλn(R)
b) G(Q,R) = + h + R− µ +
Q ⎣ 2 ⎦ Q

Kλ (100)(3360)
= = $253.39
Q 1326

⎡ Q + R − µ ⎤
h = $439.74
⎣ 2 ⎦

pλn(R) (12.80)(3360)(.77)
= = $24.97
Q 1326
 c) σ = 0 ⇒ EOQ solution

⇒ cost = 2Kλh = (2)(100)(3360)(.42) = $531.26

G(Q,R) = $718.10
⇒ cost of uncertainty = $718.10 - 531.26 = $186.84
yearly.

5.14 a) Note: We assume 4 weeks/month and 48 weeks/year.

Monthly demand is normal (µ = 28, σ = 8)

γ = 14 weeks = 3.5 months ⇒ LTD ~ normal
with µ = (28)(3.5) = 98

σ = (8) 3.5 = 15

h = Ic = (.3)(6) = 1.8
λ = (28)(12) = 336 year
p = 10
K = 15
µ = 98

(2)(336)(15)
Q0 = EOQ = = 75
1.8

F(R1) = (75)(1.8) = .04 ⇒ z = 1.75 giving

(10)(336)

R1 = σz + µ = 124
and n(R1) = σL(z) = .2426

Q1 = (2)(336) = 81
(15 + (10)(.2426))
1.8

F(R2) + (81)(1.8) = .0434

(10)(336)

z = 1.71 ⇒ R2 = σz + µ = 124. Since R2 = R1, we stop.

Conclude that (Q,R) = (81,124)

b) S = R - µ = 124 - 98 = 26 units.
5.15 a) Type 1 service of 90%

EOQ = 75 (from 13 (a))

F(R) = .10, z = 1.28, R = σz + µ = (15)(1.28) + 98 = 117

Q,R) = (75,117)

b) Find Type II service level achieved in part (a).

n(R) σL(z) (15)(.0475) = .0095

=1−β = =
Q Q 75

⇒ β = .9905 (99.05% service level)

5.16 Type 1 service of 95%

Q = EOQ = 1265

⎛ R − µ ⎞
F(R) = .95, ⎝ = 1.645, which gives R = 1683.
σ ⎠

5.17 Type 2 service of 95%. Requires iterative solution.

Q0 = EOQ = 1265

n(R1) = (1 - β)Q = (.05)(1265) = 63.25

L(z1) = n(R1 ) 63.25 = .3673

=
σ 172.18

z1 = .065, 1 - F(R1) = .474

2
n(R) ⎛ n(R) ⎞
Q1 = + (EOQ) 2 + ⎜
1 − F(R) ⎝ 1 − F(R)⎠

2
= 63.25 ⎛ n(R) ⎞ = 1405
+ (1265) + ⎜
2

.474 ⎝ 1 − F(R)⎠

n(R2) = (1 - β)Q1 = (.05)(1405) = 70.25

L(z2) = 70.25 = .4080 z2 ≈ -.02

172 .18
 1 - F(R2) = .508 R2 = σz + µ = 1397

2
Q2 = 70.25 ⎛ n(R) ⎞
+ (1265) + ⎜
2 = 1411
.508 ⎝ 1 − F(R) ⎠

n(R3) = (.05)(1411) = 70.54

L(z3) = .4097, z3 ≈ -.02, R3 = 1397

Same value. Stop.

(Q,R) = (1411,1397)

Imputed p = Qh (1411)(.42) = $ .35

=
λ (1 − F(R)) (3360)(.508)

5.18 Holding cost is h[Q/2 + R - µ].

Using a type 1 service objective, the policy obtained was (Q,R) = (1265, 1683) which results in an
average annual holding cost of $384.51.

Using a type 2 service objective, the policy was (Q,R) = (1411,1397) which results in an average
annual holding cost of $295.05

The difference is $89.46

5.19 Weekly demand has mean 38 and standard deviation 130

LTD has µ = 38 x 3 = 114

and σ = 3 130 = 19.75

a) 1 - F(R) = Qh (500)(.40)(18.80) = .004757

=
pλ (400)(1976)

z = 2.59, R = σz + µ = 165

b) Must determine optimal Q by iteration

EOQ = 198 = Q0

1 - F(R0) = (198)(7.52) = .0018838

(400 )(1976)
 z = 2.90, L(z) = .000542, n(R0) = σL(z) = .0107

Q = 2 λ [K + pn(R)] = 204
h

This value of Q turns out to be optimal. (must iterate once more to obtain R = 171).

c) Use formula G(Q,R) = h[Q/2 + R - µ] + Kλ/Q + pλn(R)/Q

Substitute (Q,R) = (500,165) from part (a)

= (204,171) from part (b)

Obtain G(500,165) = $2606.75

> Δ cost = $641.59 yearly
G(204,171) = $1965.16

d) Use the relationship n(R) = (1 - β)Q to determine R and the fact that n(R) = σ sL(z).

Hence, L(z) = n(R)

=
(1 − β )Q
=
(.01)(198) = .10026
σ σ 19.75

From Table B-4, z ≈ .90. Since R = σz + µ we obtain

R = (19.75)(.90) + 114 = 132.

The imputed shortage cost is:

^p = Qh
= $4.09.
λ ((1 − F(R))