Espartero, Remelyn D.

BSA-2B
06494 BA 424 (12:00 – 1:30 PM TTH)
MANAGEMENT SCIENCE
PROBLEMS AND SOLUTIONS
USING THE THREE INVENTORY MODELS

1. Economic Order Quantity Model

PROBLEM:

Distributor sells sewing machines at constant demand of 15,000 units per year. Each order costs
distributor P 1,500. Then, the cost of each unit to purchase from manufacturer is P 250 and the
cost to hold unit in inventory is P 30 per unit per year. In addition to that, there is a material costs
which P 200 per unit . Base from the given information, compute EOQ or the total annual cost.

SOLUTION:

EOQ = SQRT ((2 × 15,000 × 1,500) / 30)

EOQ = 1224.74487139 ( 1, 224 units)

Demand per year = P 15,000

Ordering cost = P 1,500

Holding cost = P 30

FORMULA

EOQ = √ 2× D × K
H

Annual Manual Cost = Annual demand * Material cost

P 15,000*200 = P 3,000,000

Annual Ordering Costs = ( annual demand/order quantity) * Ordering Costs

(P 15,000 / 1, 224) * 1,000 = P 12, 254

Annual Holding Costs = Average Inventory * Holding Cost ((Q/2) * h ) =

P 5,000 * 30 = P 150,000

Total Annual Costs = Annual Material Cost + Ordering Costs + Annual Holding Costs
= P 3,000,000 + 12, 254+ 150,000 = P 3, 162 , 254
2. Economic Production Lot Size Model

PROBLEM:

Organic natural soap is produced on a production line that has an annual capacity of 60,000 cases.
The annual demand is estimated at 26,000 cases with the demand rate essentially constant
throughout the year. The preparation and set up of line production line cost approximately per
case is P 135.00. The manufacturing cost per case P 4.50, and the annual holding cost is figured
at a 24% rate. Thus, Ch = IC = 0.24 ( P 4. 50) = P 1. 08. What is the recommended production lot
size?

SOLUTION:

 P = 60,000
 P = 26,000
 Co = 135
 Ch = 1.08
 Q=?

Formula :

Computation:

Q = 3,387 (the recommended production lot size)

3. Single Period Inventory Model

PROBLEM:

The buyer for the Luxx Sparkles Shoe Company decided to order women shoe shown at a buyer’s
meeting in Cebu City. The shoe will be part of the company’s spring summer promotion an will
be sold through the nine retail stores in the Cebu area. Because the shoe is only designed
exclusive for spring and summer months, it cannot be expected to sell in the fall. Luxx Sparkles
plans to hold a special August clearance sale in an attempt to sell all shoes not sold by July 31.
The shoes cost P 249.00 a pair and retail for P 299.00. At the sale price of P 199.00 a pair, all
surplus shoes can be expected to sell during the August sale. If you are the buyer of Luxx
Sparkles Shoe Company, how many pairs of shoes would you order?

SOLUTION:

Formula: P(demand < Q*) = Cu Co = P 249 – P 199= P 50

Cu+Co C u = P 299 – P 249 = P 50

P(demand < 500) = 50 / 50 + 50

= 50 / 100
= 1/2
To satisfy the expression,
650 – 350 = 300 / 1/2 = 150 units
350 + 150 = 450 pairs of shoes