Problem 1

a) Bernard operates a chocolate shop in Paris. The annual demand for chocolate-
covered cherries is 2,500 units. The setup cost is $15 per order and the unit cost is
$0.6. The holding cost per unit per year is 25% of the unit cost. Backordering is
allowed at a cost of $0.6/unit/year. What is the optimum number of units per order
and the corresponding backorder level? What is the expected number of orders per
year? Assuming a 250 day working year, what is the expected time between orders?
What are the total annual inventory costs? If delivery of the chocolates takes 2 days,
at what level of stock should a new order be placed?
b) Suppose now that Bernard is offered the following whole unit discount model: If
Bernard buys 400 units or less, it will cost him $0.7/unit, and if he buys more than
400 units it will cost him $0.5/unit. Will Bernard buys accept this offer?

Problem 2
The yearly demand for a given smartphone in Beirut is uniformly distributed between 1000
and 6000 units. This phone is expected to be obsolete after this year. This phone can be
bought from 2 possible suppliers at the beginning of the year:
Supplier A sells this phone for $1000 per unit. At the end of this year you can return unsold
phone to the supplier for $200 per unit.
Supplier B sells this phone for $890 per unit. However at the end of this year, you cannot
return any phone to this supplier and you can’t get back any money from your unsold
phones.

The phone selling price is $1200 during the selling season

a) If you have to choose only 1 supplier, which one should be chosen?
b) If Supplier A is chosen, how many sales were lost on average under the optimal
policy?
Problem 3
A leather company produces handbags. The demand for handbags over the next 6 months is
as follows:

Month Demand (number of handbags)

January 5000
February 6800
March 3000
April 4300
May 2000
June 3500

A handbag requires two hours of labor to produce. At all times, the company has a fixed
number of full time employees (30 employees). Each full time employee works 140 hours of
regular time per month. Each full time employee earns 2000$ per month. The full time
employees can work overtime for an extra 15$ per hour, if needed, the total number of
overtime hours in a month cannot exceed 500. In addition, part time workers can be hired
on a monthly basis for 1000$ per month, and each part time employee works 60 hours per
month. In addition, any extra handbag produced on a given month, can be used on a later
period. The cost of storing one handbag in the inventory is 10$ per unit per month.
Backordering is allowed at a cost of $20/unit/month.
a) Provide a constant workforce feasible plan where backordering exists only in one
Month and full-time employees do not work overtime. Calculate the corresponding
cost.
b) Formulate a linear program that minimizes the total cost. Define your decision
variables clearly.