BM1710

ACTIVITY FOR INVENTORY MANAGEMENT

Instruction: Round off your answers to the nearest whole number.

Members: Score:

1. The Warren W. Fisher Computer Corporation purchases 8,000 transistors each year as components in
minicomputers. The unit cost of each transistor is $10, and the cost of carrying one transistor in inventory for a
year is $3. Ordering cost is $30 per order.

What are (a) the optimal order quantity, (b) the expected number of orders placed each year, and (c) the
expected time between orders? Assume that Fisher operates on a 200-day working year.

a. Q* = (2DS)/H = [2 (8,000)(30)]/ 3 = 400 units

b. N = D/Q* = 8,000/400 = 20 orders

c. Time between orders = T = Number of working days / N= 200/20 = 10 working days

With 20 orders placed each year, an order for 400 transistors is placed every 10 working days

2. Annual demand for notebook binders at Meyer’s Stationery Shop is 10,000 units. Brad Meyer operates his
business 300 days per year and finds that deliveries from his supplier generally take five (5) working days.
Calculate the reorder point for the notebook binders.

L = 5 days

d = {10,000}/{300} = 33.3 units per day

ROP = d × L = (33.3 units per day)(5 days) = 166.7 units

Thus, Brad should reorder when his stock reaches 167 units.

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3. Whole Nature Foods sells a gluten-free product for which the annual demand is 5,000 boxes. At the moment, it
is paying $6.40 for each box; carrying cost is 25% of the unit cost, and ordering costs are
$25. A new supplier has offered to sell the same item for $6.00 if Whole Nature Foods buys at least 3,000 boxes
per order. Should the firm stick with the old supplier or take advantage of the new quantity discount?

Step 1, under the lowest possible price of $6.00 per box:

Economic order quantity, using Equation (12-10):

(2DS)/IP (12-10)

Q$6.00∗ = {2(5,000)(25)}/{(0.25)(6.00)} = 408.25, or 408 boxes

Because 408 < 3,000, this EOQ is infeasible for the $6.00 price. So now we calculate Q^*Q∗ for the next-higher price of

$6.40, which equals 395 boxes (and is feasible). Thus, the best possible order quantities are 395 (the first feasible EOQ)

and 3,000 (the price-break quantity for the lower price of $6.00).

Step 2 uses Equation (12-9) to compute the total cost for both of the possible best order quantities:

TC = (D/Q)S+(Q/2)IP+PD (12-9)

TC395=5,000/3,000($25)+3,000/2 (0.25) ($6.40)+$6.40(5,000)=$316+$316+$32,000=$32,632

And under the quantity discount price of $6.00 per box:

TC395=5,000/3,000($25)+3,000/2 (0.25) ($6.00)+$6.00(5,000)=$42+$2,250+$30,000=$32,292

Therefore, the new supplier with which Whole Nature Foods would incur a total cost of $32,292 is preferable, but not by

a large amount. If buying 3,000 boxes at a time raises problems of storage or freshness, the company may very well

wish to stay with the current supplier.

4. Lindsay Electronics, a small manufacturer of electronic research equipment, has approximately 7,000 items in
its inventory and has hired Joan Blasco-Paul to manage its inventory. Joan has determined that 10% of the items
in inventory are A items, 35% are B items, and 55% are C items. She would like to set up a system in which all
A items are counted monthly (every 20 working days), all B items are counted quarterly (every 60 working
days), and all C items are counted semiannually (every 120 working days). How many items need to be counted
each day?

6800x11%=748
6800x38%=2584
6800x51%=3468

748/21=35.62

2584/62=41.68

3468/124=27.97

35.62+41.68+27.97= 105.27 items

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5. Emery Pharmaceutical uses an unstable chemical compound that must be kept in an environment where both
temperature and humidity can be controlled. Emery uses 800 pounds per month of the chemical, estimates
the holding cost to be 50% of the purchase price (because of spoilage), and estimates order costs to be
$50 per order. The cost schedules of two (2) suppliers are as follows:

VENDOR 1 VENDOR 2
Quantity Price/lb Quantity Price/lb
1-499 $17.00 1-399 $17.10
500-999 16.75 400-799 16.85
1,000+ 16.50 800-1,199 16.60
1,200+ 16.25

a. What is the economic order quantity for each supplier?

For Vendor 1 at $17.00/pound, economic order quantity is 333 units (round your response to the nearest

whole number)

For Vendor 1 at $17.00/pound, economic order quantity is 332 units (round your response to the nearest

whole number)

b. What quantity should be ordered, and which supplier should be used?

Therefore the best option is to place the order with vendor 2 for an order size of 1,200 units

c. What is the total cost for the most economic order size?

The total cost of ordering a lot size of 1,200 units from Vendor 2 is $16.25

d. What factor(s) should be considered besides total cost?

Total cost is a key factor in the management of the inventories in an organization, flexibility to match

changing customer demand. But we should also consider the set up cost and carrying cost

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