TUTORIAL 5 – INVENTORY CONTROL

Question 1

The manufacturing company offers the following quantity discount schedule to the BestBag purchasing
agent that sells bags to its customers.

Order Quantity Discount Unit Cost (RM)

Below 100 None 20
100 or more 5% 19

One of the most popular bags is Beezby, which has an annual demand of 250 units. The cost of each bag
is RM20, the inventory holding cost is estimated to be 25% of the unit cost and the ordering cost is RM60
per order. What would be the optimal order quantity and the minimum total inventory cost?

(Order quantity= 100 units, TC= RM5137.50)

Question 2

Encik Danial is a store manager at Goodrink, a distributor of low-cost canned fruit drinks. Recently a
supplier introduced him a drink called 'Cheap thrill' to improve sales. The supplier offers him RM5 per can.
The carrying cost is estimated to be 10% of the unit price per annum, while the ordering cost is estimated
to be RM20 per order. The demand for the new drink is expected to be constant at a rate of 9600 cans
per year. There are 4 days between the placement of an order and the arrival of the order. The store
operates 300 days a year.
a) How many cans should be ordered to minimize the total annual inventory cost?
b) How many orders should be placed per year?
c) What is the total annual inventory cost?
d) What is the reorder point? Explain the meaning of the value.
e)
(877, 11 orders, TC=48,439.25, ROP=128 cans)

Question 3

Toilet Friends Trading, opening 300 days a year, is a retail outlet that deals with toilet accessories. The
manager is trying to decide on an inventory and reorder policy for a new brand of washbasin, which costs
RM120 each. The demand is about 4 units per day. Reordering cost is RM80 per order and holding cost
is determined to be 10% of the unit cost of this washbasin. The lead-time is 15 working days.
a) What is the economic order quantity (EOQ)?
b) When is the reorder point?
c) What is the total annual inventory cost?
d)
(EOQ=126.49 units, ROP=4x15=60 units, TC=145,517.89)

Question 4

The Quick Computer sells a printer for RM400. The annual demand is forecasted to be 1100 units. The
holding cost is RM20 per unit per year, while the cost of ordering is RM90 per order. Currently, the
company is ordering 12 times per year (92 units each time). The company operates 45 weeks per year (6
days per week) and lead time is 8 days.
a) What is the annual inventory cost for the current policy?
b) If the company used the optimal inventory policy, what would be the annual inventory cost?

(TC(current)=441,996.09, EOQ=99.5, TC(EOQ)=441,989.97)

Question 5

Records have shown that there is a demand for 100,000 dolls per year. The dolls cost RM20 each. The
cost of ordering is RM30. The manufacturer offers a discount of 2% for orders of 10,000 units or more.
The holding cost with discount is RM5.88, and the holding cost without the discount is RM6.00. How
much will be saved if the discount offer is taken?
(RM16,300)

Question 6

The demand for a component at a manufacturing firm is assessed to be a constant 2,000 units per month.
The firm pays RM25 for each component to the vendor. The annual holding cost of the component is 15%
of the unit cost. The administrative cost of placing an order is RM40 and each order is assumed to arrive
instantaneously.

Assume that no shortages are allowed and there are 20 working days in each month,
a) Determine the economic order quantity.
b) Calculate the annual total inventory cost associated with the above order size.
c) The manufacturing firm is considering two more options.

Option 2: Take advantage of a 5% discount on minimum orders of 4000 units per order offered by the
current vendor.

Should the firm order from the vendor using the optimal ordering policy or take advantage of the quantity
discount (Option 2)?

(EOQ=716, TC=602,683.28, Option 2: EOQ=734 adjust to 4000, TC = RM577,365, Choose Option 2)

Question 7

Mahligai Computer offers the following discount schedule for its printing cartridge.

Order Price
999 units or less RM25.00
1000 to 1999 units RM24.75
2000 units or more RM24.25

Andy Computer Outlet orders cartridge from Mahligai Computer. The cost of ordering is RM90 per order.
The holding cost is 20% of the unit cost, and the annual demand is 5000 units. Which discount offer do
you recommend for Andy Computer Outlet?
(Order 2000 units, TC=126325)