Problem 3.

1
A hardware shop caters to the needs of local manufacturers. One of the fast-moving
products that the shop sells is a nylon belt. The monthly demand for nylon belt is 8000
units. The shop orders these belts from its wholesaler and incurs a cost of $35 every
time an order is placed. If the holding cost of the nylon belt is $2 per unit per year,
compute the following:
(a) Order quantity that would minimize the TICs for the hardware shop
(b) Annual ordering cost
(c) Annual holding cost
(d) TIC

Answer:

Problem 3.2
A warehouse stores just one type of item. The annual demand for this item is 1200. The
warehouse manager uses a fixed order size of 100 units, equivalent to 1 month’s usage,
each time she places an order. The inventory carrying rate is 25% per annum, and the
cost of the item is $300. If the ordering cost per order is $35, compute the cost savings
(or losses) if the warehouse manager uses the EOQ concept to manage the inventory of
this item. Assume no back-ordering.

Answer:

Problem 3.3
The EOQ for an item is 300 units and its annual demand is 5000 units. If the ordering
cost per order is $20 per order, compute the implied carrying cost for this item. Assume
back-orders are not allowed and orders are received in full, instantaneously.

Answer:

Problem 3.4
ScreenShield sells a standard size of window pane laminate. Demand for the laminate
is 5000 pieces each year. The inventory holding cost, Ch, is $2.1 per piece per year,
and ordering cost per order, Co, is $18 per order. If backordering is allowed and the
shortage cost is $5 per piece per year, compute the EOQ, the number of orders,
number of back-orders, and the TIC. Also, compute the time over which inventory is on
hand and time over which shortages occur.

Answer:

Problem 3.5
A firm sells an item whose annual demand is 5000 units. If the procurement lead time is
a constant 8 days, find the reorder point. Assume 360 workdays a year.
Problem 3.6
An accountant of a firm has collated the following inventory data pertaining to a fragile
item that costs $50 managed at her firm’s warehouse. If the annual demand for the item
is 2400, compute the EOQ and the TIC for this item.

Type of cost Values

Opportunity cost of investment in inventory 8.5%
Fixed cost of order generation per order $35
Cost of inspecting items received $5
Cost due to breakage or spoilage 6.5%
Warehouse rental 3%
Insurance costs 1%

Answer: