School of Industrial Engineering & Management (IEM) Inventory Management

International University, VNU-HCM Instructor: Dr. Nguyen Van Hop

Homework 2_Chapter 2 (continued)

Deadline: Class Day next week

Nguyễn Thị Như Quỳnh

Student’s ID: IELSIU19252

Problem 1:
 The origin:

 Change the range of quantity to the levels of 500 units:

2∗Co∗D
The optimal quantity: Q* =
√ H∗Ci
Total cost: TC = (Q/2)*Ch + (D/Q)*C0 + D*Ci + SS*Ch

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 In conclusion, the AAC company should change its decision. Now the firm should
order 2000 juicers as it results in the minimum total annual cost

 Change the discount price to the levels of 0.5USD:

 In conclusion, the AAC company should change its decision. Now the firm should
order 5000 juicers as it results in the minimum total annual cost

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Problem 2:
The optimal order size:
2∗D∗Co
Q* =
√ Ch
Cs
∗Ch+Cs
−
(D∗Cb) 2
Ch∗Cs

The optimal backorder level:

Q∗x Ch−D x Cb
S* =
Ch+Cs

Reorder point:

R = L x D – S*

 In conclusion, changing lead-time leads to the changes of reorder point. We can see
that the change in lead-time cannot impact order quantity and total annual cost.
Although it doesn’t affect the total inventory cost, it requires us to adjust the order
scheduling like if the lead time is extended, you should place an order earlier or need to
add some more safety stock to prevent the risk of stock out.

Problem3:
a/ What is the optimal order quantity?
D = 4000 units/yr

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A = $5
v = $4 per 100 units
r= 0.25$/$/yr
The economic order quantity of the item:

2∗5∗4000
Q* =
√ 2∗A∗D
v∗r
=
(
√
4
100
)∗0.25
= 2000 units

b/ What is the time between consecutive replenishments of the item when the EOQ is
used?
The cycle time (in years) T = Q*/ D = 2000/4000 = 0.5 year
c/ The production manager insists that the fixed ordering cost A ($5) figure is only a
guess. Therefore, he insists on using his simple 3-month supply rule. Indicate how you
would find the range of A values for which the optimal order quantity EOQ (based on A
= $5) would be preferable (in terms of a lower total of replenishment and carrying costs)
to the 3-month supply?
 For the three-month supply:
Q = 4000/4 = 1000 units
TV (1000) = (Q/2)*Ch + (D/Q)*C0 = (1000/2)*0.25*4/100+(4000/1000)*A = 5+4A
 For EOQ:
TV(2000) = (2000/2)*0.25*4/100+(4000/2000)*5 =$20
We have:
TV(2000)<TV(1000)
20<5+4A
 A >3.75

Problem 4:
a/ If Ernie is implicitly following an EOQ policy, what can Bert say about the implicit
values of the two missing parameters?
D 200 cookies/day
Ci $0.03/each
Ch 0.03H

Ernie has to buy 200*7 = 1400 (cookies/week) in case he goes to store once a week

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We have:
1400 = √ (2∗200∗Co)/(0.03 H )
 Co/H = 147
b/ Suppose that the store offered a special of 10,000 cookies for $200. Should Ernie take
advantage of the offer? Discuss.
The cost savings from a special order for 10,000 at the discount price is:
F(10,000) = (10,000/200)*√ (2∗200∗Co∗0.03 H) +10,000*0.03 – Co – 10,000*0.02 –
(10,000^2 *0.02H)/(2*200) = 0
We substitute Co = 147H:
 (10,000/200)*√ (2∗200∗147 H∗0.03 H) +10,000*0.03 – 147H – 10,000*0.02 –
(10,000^2 *0.02H)/(2*200) = 0
 H = 0.0328 per day = 0.0328*365 = 11.972 per year
 In conclusion, we can conclude that Ernie’s interest rate is less than 1.197% per year.
So, the store can take positive savings from this special offer. But there is also a risk of
the cookies expiration if the store cannot sell out in time because the cookies shelf life is
just 50 days (10000 cookies divided by 200 cookies/day = 50 days)

Problem 5:
 Item 1

 In conclusion, the firm should order 2000 units as it results in the minimum total
annual cost
 Item 2:

 In conclusion, the firm should order 183 units as it results in the minimum total
annual cost
 Item 3:

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 In conclusion, the firm should order 1000 units as it results in the minimum total
annual cost
 Item 4:

 In conclusion, the firm should order 2136 units as it results in the minimum total
annual cost

Problem 6:

 T = 0.19 year = 9.8 weeks

 Every 9.8 weeks we make the order with quantity of 67.79 units.