INVENTORY MANAGEMENT

PROBLEM #1

Barter Corporation had been buying Product A in lots of 1,200 units which represents
average supply for four months. The cost per unit is P100; the order cost is P200 per order; and
the annual inventory carrying cost for one unit is P25. The lead time is 5 days. (Use 360-day year)
1. What is the economic order quantity? 240 units
2. Frequency of order 24 days
3. Total inventory cost P6,000
4. Reorder point 50 units
5. Safety stock if the maximum daily usage is 14 units 20 units

PROBLEM #2

Neggie Corp has a secret ingredient in its production. This ingredient costs the company
P60 each from the supplier and requires a 6-day lead time. The demand every quarter is 13,680
units. The ordering cost is P12.50 per order. (EOQ is 1200 units)

1. The carrying cost per unit is P0.95

2. The desired safety stock if the maximum daily usage is 175 units is 138 units
3. The total inventory cost amounts to P1,140

PROBLEM #3

The General Chemical Company uses 150,000 gallons of hydrochloric acid per month. The
cost of carrying the chemical in inventory is 50 cents per gallon per year, and the cost of ordering
the chemical is P150 per order. The firm uses the chemical at a constant rate throughout the year.
It takes 18 days to receive an order once it is placed.

1. The chemical’s economic order quantity is 32,863.35 units

2. The reorder point is 90,000 gallons
3. If the maximum usage is 162,000 gallons per month, the safety stock is 7,200 gallons

PROBLEM #4

The ReignLyn Tags Company produces a luggage and bag tag product, and has the
following information available concerning its inventory items:

Annual demand - 50,000 units per year

Purchase price - ₱35 per package
Ordering costs - ₱250 per purchase order
Carrying costs - 10% of purchase price plus: ₱4.50

1. What is the economic order quantity? 1,767.77 units

2. What are the total relevant costs at the economic order quantity? P14,142
3. What are the total relevant costs, assuming the quantity ordered equals 1,000 units?
P16,500
 PROBLEM #5

Yana Corp’s monthly material requirement used in production is 4,050 units. This material
costs P180 per unit for a supplier and it requires 5 days lead time from the date of order to date
of delivery. The ordering cost is P120 per order and the carrying cost is 8% of inventory
investment per unit. (Use 360 days).
Determine the following:
1. EOQ 900 units
2. Frequency of order 6.67 days
3. Total inventory cost P12,960
4. Reorder point 675 units
5. Reorder point if maximum daily usage is 150 units 750 units
6. Safety stock 75 units

PROBLEM #6

RCR Company has a secret ingredient in its production. This ingredient costs the company
P60 each from the supplier and requires 5-day lead time. The ordering cost is P25 per order and
the carrying cost per unit is 10% of purchase price. (EOQ is 2,400 units).

Determine the following:

1. Annual demand 691,200 units
2. Frequency of order 1.25 days
3. Total inventory cost P14,400
4. Reorder point 9,600 units
5. Reorder point if maximum daily usage is 2,000 units 10,000 units (correction in green
font)
6. Safety stock 400 units

PROBLEM #7

Viray Company makes bicycles. It produces 800 bicycles a month. It buys the tires for bicycles
from a supplier at a cost of P20 per tire. The company’s inventory carrying cost is estimated to be
15% of cost and the ordering is P50 per order.
1. Calculate the EOQ. 800 units
2. What is the number of orders per year? 24 orders
3. Compute the average inventory. 400 units

PROBLEM #8

The Polly Company wishes to determine the amount of safety stock that it should
maintain for Product D that will result in the lowest cost. The following information is available:

Stock-out cost per occurrence P80

Carrying cost per unit of safety stock P4
Number of purchase orders per year 5

With the below available options open to Polly, determine the number of units of safety
stock that will result in the lowest cost.

Units of Probability of Running

Safety stock out of Safety stock
20 50%
30 40%
40 25%
50 10%
60 5%
 Probability of
Units of Total Stock
Running out of Carrying Cost Total Cost
Safety Stock Out Cost
Safety Stock
20 50% ₱200.00 ₱80.00 ₱280.00
30 40% 160.00 120.00 280.00
40 25% 100.00 160.00 260.00
50 10% 40.00 200.00 240.00
60 5% 20.00 240.00 260.00

Total Stock out cost = Probability x P80 x 5

Carrying Cost = Units of Safety Stock x P4/unit
The answer is 50 units. It has the least total cost.