30/03/2021

TUTORIAL 1 -
(BASIC STATIC EOQ)

NAME:

Matric Number:

1. A company makes bicycles. It produces 450 bicycles a month. It buys the tires for bicycles
from a supplier at a cost of $20 per tire. The company’s inventory carrying cost is estimated to
be 15% of cost and the ordering is $50 per order.
a. Calculate the EOQ
b. What is the number of orders per year?
c. Compute the average annual ordering cost.
d. Compute the average inventory.
e. What is the average annual carrying cost?
f. Compute the total cost.

2. Azim furniture company handles several lines of furniture, one of which is the popular Layback
Model TT chair. The manager, Mr. Majid, has decided to determine by use of the EOQ model
the best quantity to obtain in each order. Mr. Majid has determined from past invoices that he
has sold about 200 chair during each of the past five years at a fairly uniform rate and he expects
to continue at that rate. He has estimated that preparation of an order and other variable costs
associated with each order are about RM 10, and it costs him about 1.5 % per month (or 18%
per year) to hold items in stock. His cost for the chair is RM 87.
a. How many layback chairs should be ordered each time?
b. How many orders would there be?
c. Determine the approximate length of a supply order in days?
d. Calculate the minimum total inventory cost
e. Show and verify that the annual holding cost is equal to the annual ordering cost (due to
rounding, show these costs are approximately equal)

3. Wilson Publishing Company produces books for the retail market. Demand for a current book
is expected to occur at a constant annual rate of 7200 copies. The cost of one copy of the book
is RM14.50. The holding cost is based on an 18% annual rate and production setup costs are
RM150 per setup. The equipment with which the book is produced has an annual production
 30/03/2021
TUTORIAL 1 -
(BASIC STATIC EOQ)
volume of 25,000 copies. Wilson has 250 working days per year and the lead time for a
production run is 15 days. Compute the following values:
(a) Minimum cost production lot size.
(b) Number of production runs per year.
(c) Cycle time.
(d) Length of a production run.
(e) Maximum inventory.
(f) Total annual cost.
(g) Reorder point.

4. TT Beverage Co. is a distributor of beer, wine and soft drinks product. From a main warehouse
located in Malaysia, TRNC, TT supplies nearly 1000 retail stores with beverage products. The
beer inventory, which constitutes about 40% of the company’s total inventory, averages
approximately 50 000 cases. With an average cost per case of approximately RM 8, TT
estimates the value of its beer inventory to be RM 400 000. The warehouse manager has decided
to do a detailed study of inventory costs associated with Sergio Beer, the # 1 selling TT beer.
The purpose of the study is to establish the “how-much to order,” and “when to order” decisions
for Segio Beer that will result in the lowest possible cost. The manager found that the demand
is constant and 2 000 cases/week. The cost of holding for the TT beer inventory is 25% of the
value of the inventory. (Note that definding the holding cost as a % of the value of the product
is convenient, because it is easily transferable to other products) TT is paying RM 32/order
regardless of the quantity requested in the order. Suppose TT is open 5 days each week, and the
manufacturer of Sergio Beer guarantees 2-day delivery on any order placed.
a) Find Economic Order Quantity
b) Find reorder point.
c) How frequently the order will be placed?
d) Find the cycle time?
e) Calculate minimum total inventory cost