Solutions to Inventory Practice Problems

1. If D = 1,000 per year, S = $62.50 per order, and H = $0.50 per unit per year, what is
the economic order quantity?
We’ll use these symbols to represent the parameters of inventory systems:
Q = Number of units per order
Q* = Optimum value for Q (EOQ)
D = Annual demand in units
S = Setup or ordering cost per order
H = Holding or carrying cost per unit per year
I = Percent holding cost
C = Price per unit
d = Daily demand
L = Lead time in days

2 DS
Q* 
H
2 *1000 * 62.5

0 .5
 500

2. If D = 8,000 per month, S = $45 per order, and H = $2 per unit per year, what is the
economic order quantity?
Note that annual demand is 12 * 8,000 = 96,000.
2 DS
Q* 
H
2 * 96,000 * 45

2
 2,078
 3. If the economic order quantity = 300, annual demand = 8,000 units, and order costs = $45
per order, what is the annual per unit holding cost?
2 DS
Q* 
H
2 * 8000 * 45
300 
H
720,000
90,000 
H
90,000 * H  720,000
H 8

4. Kara Chubrik uses 1,500 per year of a certain subassembly that has an annual per
unit holding cost of $45 per unit. Each order placed costs Kara $150. She operates
300 days per year, and has found that an order must be placed with her supplier 6
working days before she can expect to receive that order. For this subassembly, find
(a) Economic Order quantity
2 DS
Q* 
H
2 *1500 *150

45
 100
(b) Total annual holding cost
Q
Annual holding cost  H
2
100
 * 45
2
 $2,250

(c) Annual ordering cost

D
Annual ordering cost  S
Q
1,500
 *150
100
 $2,250

Operations Management 2 Profs. Juran and Pinedo

 (d) Reorder point
R  dL
1,500
 *6
300
 30

5. Lead time for one of your fastest-moving products is 21 days. Demand during this period
averages 100 units per day. What would be an appropriate reorder point?
R  dL
 100 * 21
 2,100

6. Cong Manufacturing has gone out to bid for a regulator component. Expected demand is 700
units per month. The item can be purchased either from Vesey Manufacturing or from
Vaccaro manufacturing. Their price lists are shown below. Ordering cost is $50, and annual
holding cost per unit is $5.
Vesey Mfg. Vaccaro Mfg.
Quantity Unit Price Quantity Unit Price
1-499 $16.00 1-399 $16.10
500-999 15.50 400-799 15.60
1000+ 15.00 800+ 15.10
(a) What is the economic order quantity?
Note that D = 12*700 = 8,400.
2 DS
Q* 
H
2 * 8,400 * 50

5
 410

Operations Management 3 Profs. Juran and Pinedo

(b) Which supplier should be used? Why?
Step 1. Calculate a value for Q* (we did this in part (a) above).
Step 2: For any discount, if the order quantity is too low to qualify for the discount, adjust
Q upward to the lowest feasible quantity.
For Vesey:
Quantity Min Unit Price Q* Adjusted Q*
1-499 1 16.00 410 410
500-999 500 15.50 410 500
1000+ 1000 15.00 410 1000
For Vaccaro:
Quantity Min Unit Price Q* Adjusted Q*
1-399 1 16.10 410 410
400-799 400 15.60 410 410
800+ 800 15.10 410 800
(c) What is the optimal order quantity and the total annual cost?
Step 3: Calculate the total annual cost for each Q*.
Total annual cost = Ordering Cost + Holding Cost + Purchasing Cost
D Q
 S  H  CD
Q 2
For Vesey:
Quantity Min Unit Price Q* Ordering Cost Holding Cost Purchasing Cost Total
1-499 1 $ 16.00 410 $ 1,025 $ 1,025 $ 134,400 $136,449
500-999 500 $ 15.50 500 $ 840 $ 1,250 $ 130,200 $132,290
1000+ 1000 $ 15.00 1000 $ 420 $ 2,500 $ 126,000 $128,920
For Vaccaro:
Quantity Min Unit Price Q* Ordering Cost Holding Cost Purchasing Cost Total
1-399 1 $ 16.10 410 $ 1,025 $ 1,025 $ 135,240 $137,289
400-799 400 $ 15.60 410 $ 1,025 $ 1,025 $ 131,040 $133,089
800+ 800 $ 15.10 800 $ 525 $ 2,000 $ 126,840 $129,365

Step 4: Select the Q* with the lowest total annual cost.

It looks like the thing to do is to order 1,000 at a time from Vesey Manufacturing.

Operations Management 4 Profs. Juran and Pinedo

 7. Costello Engineering has summarized the price list from four potential suppliers of
a valve assembly. See the table below. Annual usage is 2,400 valves; order cost is
$10 per order; and annual inventory holding costs are $3.33 per unit.
Which vendor should be selected, and what order quantity is best if Costello wants to minimize
total cost?
Vendor A Vendor B Vendor C Vendor D
Quantity Price Quantity Price Quantity Price Quantity Price
1-49 $35.00 1-74 $34.75 1-99 $34.50 1-199 $34.25
50-74 $34.75 75-149 $34.00 100-199 $33.75 200-399 $33.00
75-149 $33.55 150-299 $32.80 200-399 $32.50 400+ $31.00
150-299 $32.35 300-499 $31.60 400+ $31.10
300-499 $31.15 500+ $30.50
500+ $30.75
Step 1. Calculate a value for Q*:
2 DS
Q* 
H
2 * 2,400 *10

3.33
 120
Step 2: For any discount, if the order quantity is too low to qualify for the discount, adjust
Q upward to the lowest feasible quantity.
Step 3: Calculate the total annual cost for each Q*.
Vendor A
Quantity Price Min Q* Adj. Q* Holding Cost Ordering Cost Purchasing Cost Total Cost
1-49 $35.00 1 120 120 $ 199.90 $ 199.90 $ 84,000.00 $84,399.80
50-74 $34.75 50 120 120 $ 199.90 $ 199.90 $ 83,400.00 $83,799.80
75-149 $33.55 75 120 120 $ 199.90 $ 199.90 $ 80,520.00 $80,919.80
150-299 $32.35 150 120 150 $ 249.75 $ 160.00 $ 77,640.00 $78,049.75
300-499 $31.15 300 120 300 $ 499.50 $ 80.00 $ 74,760.00 $75,339.50
500+ $30.75 500 120 500 $ 832.50 $ 48.00 $ 73,800.00 $74,680.50
Vendor B
Quantity Price Min Q* Adj. Q* Holding Cost Ordering Cost Purchasing Cost Total Cost
1-74 $34.75 1 120 120 $ 199.90 $ 199.90 $ 83,400.00 $83,799.80
75-149 $34.00 75 120 120 $ 199.90 $ 199.90 $ 81,600.00 $81,999.80
150-299 $32.80 150 120 150 $ 249.75 $ 160.00 $ 78,720.00 $79,129.75
300-499 $31.60 300 120 300 $ 499.50 $ 80.00 $ 75,840.00 $76,419.50
500+ $30.50 500 120 500 $ 832.50 $ 48.00 $ 73,200.00 $74,080.50

Operations Management 5 Profs. Juran and Pinedo

Vendor C
Quantity Price Min Q* Adj. Q* Holding Cost Ordering Cost Purchasing Cost Total Cost
1-99 $34.50 1 120 120 $ 199.90 $ 199.90 $ 82,800.00 $83,199.80
100-199 $33.75 100 120 120 $ 199.90 $ 199.90 $ 81,000.00 $81,399.80
200-399 $32.50 200 120 200 $ 333.00 $ 120.00 $ 78,000.00 $78,453.00
400+ $31.10 400 120 400 $ 666.00 $ 60.00 $ 74,640.00 $75,366.00
Vendor D
Quantity Price Min Q* Adj. Q* Holding Cost Ordering Cost Purchasing Cost Total Cost
1-199 $34.25 1 120 120 $ 199.90 $ 199.90 $ 82,200.00 $82,599.80
200-399 $33.00 200 120 200 $ 333.00 $ 120.00 $ 79,200.00 $79,653.00
400+ $31.00 400 120 400 $ 666.00 $ 60.00 $ 74,400.00 $75,126.00

Step 4: Select the Q* with the lowest total annual cost.

Go with Vendor B; order in quantities of 500.

8. Demand during lead time for one brand of TV is normally distributed with a mean of 36
TVs and a standard deviation of 15 TVs. What safety stock should be carried for a 90%
service level? What is the appropriate reorder point?
R  dL  z 
 36  1.2815
 55

9. Based on available information, lead time demand for CD-ROM drives averages 50
units (normally distributed), with a standard deviation of 5 drives. Management
wants a 97% service level.
(a) What value of z should be applied?
The appropriate z-value is approximately 1.88.

(b) How many drives should be carried as safety stock?

z s  1.88 * 5
9
(c) What is the appropriate reorder point?
R  dL  z 
 50  9
 59

Operations Management 6 Profs. Juran and Pinedo

 10. Using the fixed-time period inventory model, and given daily demand with an average of
300 units and standard deviation of 12 units, 4 days between inventory reviews, 5 days for
lead time, 1,200 units of inventory on hand, a stockout probability of 0.05, what quantity
should be ordered?
Q  d T  L   zT L  I
 300 4  5   1.645  
4  5 * 12  1200
 2700  59.2  1200
 1,559.2

Operations Management 7 Profs. Juran and Pinedo