POM Class assignment 60’

Sem2 2021-2022- Code B

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PART 1: MULTICHOICE (30 points)

1. ABC analysis divides on-hand inventory into three classes, generally based upon which of the
following?
A) item quality
B) unit price
C) the number of units on hand
D) annual demand
E) annual dollar volume

2. When quantity discounts are allowed, the cost-minimizing order quantity:

A) is always an EOQ quantity.
B) minimizes the sum of holding and ordering costs.
C) minimizes the unit purchase price.
D) minimizes the sum of holding, ordering, and product costs.
E) may be a quantity below that at which one qualifies for that price.

3. All EXCEPT which of the following statements about ABC analysis are true?
A) In ABC analysis, inventory may be categorized by measures other than dollar volume.
B) ABC analysis categorizes on-hand inventory into three groups based on annual dollar volume.
C) ABC analysis is an application of the Pareto principle.
D) ABC analysis suggests that all items require the same high degree of control.
E) ABC analysis suggests that there are the critical few and the trivial many inventory items.

4. The purpose of safety stock is to:

A) replace failed units with good ones.
B) eliminate the possibility of a stockout.
C) eliminate the likelihood of a stockout due to erroneous inventory tally.
D) control the likelihood of a stockout due to variable demand and/or lead time.
E) protect the firm from a sudden decrease in demand.

5. A certain type of computer costs $1,000, and the annual holding cost is 25% of the value of the
item. Annual demand is 10,000 units, and the order cost is $150 per order. What is the approximate
economic order quantity?
A) 16
B) 70
C) 110
D) 183
E) 600

6. Which of the following statements regarding the reorder point is TRUE?

A) The reorder point is that quantity that triggers an action to restock an item.
B) There is a reorder point even if lead time and demand during lead time are constant.
C) The reorder point is larger than d × L if safety stock is present.
D) A shorter lead time implies a smaller reorder point.
 E) All of the above are true.

7. Which of the following is a function of inventory?

A) to decouple various parts of the production process
B) to provide a selection of goods for anticipated customer demand and to separate the firm from
fluctuations in that demand
C) to take advantage of quantity discounts
D) to hedge against inflation
E) All of the above are functions of inventory.

8. Which of the following items is mostly likely managed using a single-period order model?
A) Christmas trees
B) canned food at the grocery store
C) automobiles at a dealership
D) metal for a manufacturing process
E) gas sold to a gas station

9. Service level is:

A) the probability of stocking out.
B) the probability of not stocking out.
C) something that should be minimized in retail.
D) calculated as the cost of a shortage divided by (the cost of shortage + the cost of overage) for
single-period models.
E) B and D

10. The two most basic inventory questions answered by the typical inventory model are:
A) timing of orders and cost of orders.
B) order quantity and cost of orders.
C) timing of orders and order quantity.
D) order quantity and service level.
E) ordering cost and carrying cost.

PART II: SOLVE PROBLEM (70 points)

Problem 1: (20 points) Thomas' Bike Shop stocks a high volume item that has a normally distributed
demand during lead time. The average daily demand is 100 units, the lead time is 4 days, and the
standard deviation of demand during lead time is 15.
1) How much safety stock provides a 95% service level to Thomas?
2) What should the reorder point be?

The average daily demand = 100 units

The lead time day = 4 days
The standard deviation of demand = 15
Service level = 95%
 Z-value for achieving 95% service level = 1.65
Mean lead time demand = The average daily demand * Lead time = 70*4 = 280 units

Safety stock = Number of standard deviations * Standard deviation of demand during lead time

= 1.65*15 = 24.75 or 25 units

ROP = Mean lead time demand + Safety stock = 280 + 25 = 305 units

Problem 2: (50 points) The annual demand, ordering cost, and the annual inventory carrying cost rate
for a certain item are D = 700 units, S = $20/order and I = 30% of item price. Price is established by
the following quantity discount schedule. What should the order quantity be in order to minimize the
total annual cost?

Quantity 1 to 49 50 to 249 250 and up

Price $5.00 per unit $4.50 per unit $4.10 per unit
Questions:
1) What is the optimal order quantity, given the following price breaks for purchasing the item?
2) What is the total annual cost at the optimal behavior? What’s is your recommendation?

D = 700 units
S = $20/order
I = 30% of item price.

Quantity range Price C Holding cost H

1 to 49 5 = 5*0.3 = 1.5
50 to 249 4.5 = 4.5*0.3 = 1.35
250 and up 4.1 = 4.1*0.3 = 1.23

Apply the formula EOQ =

√
2 2 DS
H
to calculate EOQ at different range

Quality range EOQ Feasible

1 to 49 = √(2∗700∗20)/1.5 = 136.63 Not feasible
50 to 249 = √(2∗700∗20)/1.35 = 144.02 Feasible
250 and up = √(2∗700∗20)/1.23 = 150.88 Not feasible

At Q=144 units is feasible with the range of 50 to 249. But we calculate total cost at Q=144 and
Q=250 units
Total cost = Purchasing cost + Annual holding cost + Annual ordering cost = CD + (Q/2)H + (D/Q)S

With Q=144 and C=4.5

Total cost = (4.5*700) + (144/2)*1.35 + (700/144)*20 = 3344.42
With Q=250 and C=4.1
Total cost = (4.1*700) + (250/2)*1.23 + (700/250)*20 = 3079.75

So, total cost is less at Q=2504

250 should be the order quantity in order to minimize the total cost.

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