Inventory Management Workbook

Problems

1. A firm’s inventory planning period is one year. Its inventory requirement for this
period is 1,600 units. Assume that its acquisition costs are Rs. 50 per order. The
carrying costs are expected to be Re. 1/- per unit per year for an item.
The firm can procure inventories in various lots as follows: (i) 1,600 units, (ii) 800
units, (iii) 400 units, (iv)200 units, and (v) 100 units. Which of these order quantities
is the economic order quantity? [Ans. EOQ 400
units]

1
2. The following details are available in respect of a firm:
i. Inventory requirement per year, 6000 units
ii. Cost per unit (other than carrying and ordering costs), Rs. 5/-
iii. Carrying costs per item for one year, Re. 1/-
iv. Cost of placing each order, Rs. 60/-
v. Alternative order sizes: (units) 6000, 3000, 2000, 1200, 1000, 600 and 200.

Determine the economic order quantity. [Ans. 1000 units]

2
3. The annual demand for an item is 3200 units. The unit cost is Rs. 6/- and inventory
carrying charges 25% p.a. If the cost of one procurement is Rs. 150/-, determine;
i. EOQ
ii. Number of orders p.a.
iii. Time between two consecutive orders.
[Ans. i. 800 units, ii. 4 orders p.a., iii. 3 months]

3
4. Smart Ltd. buys a lot of 125 boxes which is 3 months supply. The cost per box is Rs.
125/- and the ordering cost is Rs. 250/- per order. The inventory carrying cost is
estimated at 20% of unit value p.a. You are required to determine;
i. EOQ
ii. What is the total annual cost of the existing inventory policy?
iii. How much money would be saved by employing EOQ ?
[Ans. i. 100 boxes, ii. Rs. 65,062.5/-, iii. Rs.
62.5/-]

4
5. The following information is related to Quantum Ltd. The annual usage is 10,000
units. Cost per order is Rs. 150/- and purchase price per unit is Rs. 20/-. The carrying
cost is charged at 25% of inventory value. Minimum order size required for discount
is 1000 units. Discount is Re. 1/- per unit. Determine the optimum order quantity
considering discount. [Ans. 1000/- units]

5
6. Consider the inventory system with the following data:
Consumption Rate = 1000 units/year
Carrying cost = 30% of unit price
Price per unit = 50 paisa
Ordering cost = Rs. 10/-
Lead time = 2 years
Determine;
i. Optimum order quantity
ii. Reorder point. [Ans. i. 365 units, ii.
1635]

6
7. Two components, A and B are, used as follows:

Normal usage 50 units each per week

Minimum usage 25 units each per week
Maximum usage 75 units each per week
Re-order quantity A: 300 units B: 500 units
Re-order period A: 4to 6 weeks B: 2 to 4
weeks
Calculate for each component:
i. Re-order level [ans. A: 450 units, B: 300
units]
ii. Minimum level [ans. A: 200 units, B: 150
units]
iii. Maximum level [ans. A: 650 units, B: 750
units]
iv. Average stock level [ans. A: 350 units, B: 400
units]

7
8. A company uses annually 24000 units of a raw material which costs Rs. 1.25 per unit.
Placing each order Rs. 22.5/- and the carrying cost is 5.4% per year of the average
inventory. Find the economic order quantity, and the total inventory cost (including
the cost of materials).
Should the company accept the offer made by the supplier of a discount of 5% on
the cost price on a single order if 24,000 units?
Suppose the company works for 300 days a year. If the procurement time is 12
days and safety stock is 400 units, find the re-order level point, the minimum,
maximum and average inventory.

8
9. A company uses annually 50,000 units of an item each costing Rs. 1.20/-. Each order
costs Rs. 45/- and inventory carrying costs 15% of the annual average inventory
value.
i. Find EOQ
ii. If the company operates 250 days a year, the procurement time is 10 days and
safety stock is 500 units, find the re-order level, maximum, minimum and
average inventory.

9
10. The following information is known about a group of items. Classify the materials in
A,B,C classifications.

Model No. Annual Consumption in pieces Unit Price (paisa Per

pieces)
501 30,000 10
502 2,80,000 15
503 3,000 10
504 1,10,000 5
505 4,000 5
506 2,20,000 10
507 15,000 5
508 80,000 5
509 60,000 15
510 8,000 10

10
11. Perform ABC analysis on the following sample of items of an inventory.

Items Annual Consumption Number Price per unit (in paisa)

A 300 10
B 100 5
C 30 10
D 1100 5
E 40 5
F 220 100
G 1500 5
H 800 5
I 600 15
J 80 10

11
12. A firm requires 90,000 units of certain items annually. The cost per unit is Rs. 3/-.
The cost per purchase order is Rs. 300/- and inventory carrying cost is Rs. 6/- per unit
p.a.
i. What is EOQ?
ii. What should the firm do if the suppliers offer discount as follows:

Order Qty. Discount

4500-5999 2%
6000 and 3%
above

12
13. The purchase department of an organization has received an offer of quantity discount
on its order of materials as under:

Price per tons Tons

Rs. 1,400 Less than 500
Rs. 1,380 500 and less than 1,000
Rs. 1,360 1,000 and less than 2,000
Rs. 1,340 2,000 and less than 3,000
Rs. 1,320 3,000 and above
The annual requirement of material is 5,000 tons. The delivery cost per order is Rs.
1,200/- and the annual stock holding cost is estimated at 20% of the average
inventory.
The purchase department wants you to consider the following purchase options
and advise which among them will be the most economical order quantity, present
information in tabular form.
The purchase options to be considered are:
400 tons, 500 tons, 1000 tons, 2000 tons and 3000 tons

13
14. Find the optimal order quantity for a product where the annual demand for the product
is 500 units. The cost of storage per unit per year is 10% of the unit cost and order
cost per order is Rs. 180/-. The unit costs are given below:

Quantity Unit cost (Rs.)

0≤Q1≤500 25.00
500≤Q2≤1500 24.80
1500≤Q3≤300 24.60
0
3000≤Q4 24.40

14
15. A firm has 7 different items in its inventory. The average number of each of these
items held, along with their unit cost, is listed below. The firm wishes to introduce an
ABC inventory system. Suggest a breakdown of the items into A,B, and C
classifications.

Item Number Average no. of units in inventory Average cost per unit
(Rs.)
1 20,000 60.80
2 10,000 102.40
3 32,000 11.00
4 28,000 10.28
5 60,000 3.40
6 30,000 3.00
7 20,000 1.3

15
 16. A firm has several items of inventory. The average number of each of these items as
well as their unit cost is listed below:

Item Average no. of units in inventory Average cost per unit

(Rs.)
1 4,000 1.96
2 200 10.00
3 440 2.40
4 2,000 16.80
5 20 165.00
6 300 6.00
7 160 76.00
8 3,000 3.00
9 1,200 1.90
10 6,000 .50
11 1,800 25.00
12 130 2.70
13 4,400 9.50
14 3,200 2.60
15 1,920 2.00
16 800 1.20
17 3,400 2.20
18 2,400 10.00
19 120 21.00
20 320 4.00
The firm wishes to adopt ABC inventory system. How should the items be classified into
A,B, and C?

16
17