Sotero 07PracticeProblems1 Inventory

Sotero, Maria Bernaditte L.
BSBA
7 PRACTICE PROBLEMS 1
1. The monthly demand for an item over six (6) months is 32, 19, 12, 15, 23, 12 units, respectively.
Using the lot-for-lot method, determine the total inventory cost if the holding cost is ₱1.5 per unit
per month and the ordering cost is ₱40 per order.
𝑂𝐶 ₱40 per order 𝐻 ₱1.5 per unit per period

Iteration 1
Start the solution process by placing an order for 32 units in January.
Month Jan Feb March April May June
Demand (kg) 32 19 12 15 23 12
Cost Incurred for January

Type of cost Description
Ordering cost Since the order is placed, we incur an ordering cost of ₱40.
Holding cost Assume that the ordered quantity will be received in full at the beginning of January.
Thus, the inventory level at the beginning of January would be 32 units, and that at the
end of January would be 0. The average inventory level in January would, therefore,
be
32+0
= 2
= 16 𝑢𝑛𝑖𝑡𝑠
The holding cost for January would be 16 × ₱1.5 or ₱24
Iteration 2
Next, place an order for 19 units at the beginning of February that will completely meet the demand for
that month.
Demand (kg) 32 19 12 15 23 12
Cost Incurred for February

Holding cost Assume that the ordered quantity will be received in full at the beginning of February.
Thus, the inventory level at the beginning of February would be 19 units, and that at the
end of February would be 0. The average inventory level in February would, therefore, be
19+0
= 2
= 9.5 𝑢𝑛𝑖𝑡𝑠
The holding cost for February would be 9.5 × ₱1.5 or ₱14.25
Iteration 3
Next, place an order for 12 units at the beginning of March that will completely meet the demand for that
month.
Demand (kg) 32 19 12 15 23 12
Cost Incurred for March

Holding cost Assume that the ordered quantity will be received in full at the beginning of March. Thus,
the inventory level at the beginning of March would be 12 units, and that at the end of
March would be 0. The average inventory level in March would, therefore, be
12+0
= 2
The holding cost for March would be 6 × ₱1.5 or ₱9
Iteration 4
Next, place an order for 15 units at the beginning of April that will completely meet the demand for that
month.
Demand (kg) 32 19 12 15 23 12
Cost Incurred for April

Holding cost Assume that the ordered quantity will be received in full at the beginning of April. Thus,
the inventory level at the beginning of April would be 15 units, and that at the end of
April would be 0. The average inventory level in April would, therefore, be
15+0
= 2
The holding cost for April would be 7.5 × ₱1.5 or ₱11.25
Iteration 5
Next, place an order for 23 units at the beginning of May that will completely meet the demand for that
month.
Demand (kg) 32 19 12 15 23 12
Cost Incurred for May

Holding cost Assume that the ordered quantity will be received in full at the beginning of May. Thus,
the inventory level at the beginning of May would be 23 units, and that at the end of May
would be 0. The average inventory level in May would, therefore, be
23+0
= 2
The holding cost for May would be 11.5 × ₱1.5 or ₱17.25
Iteration 6
Next, place an order for 12 units at the beginning of June that will completely meet the demand for that
month.
Demand (kg) 32 19 12 15 23 12
Cost Incurred for June

Holding cost Assume that the ordered quantity will be received in full at the beginning of June. Thus,
the inventory level at the beginning of June would be 12 units, and that at the end of June
would be 0. The average inventory level in June would, therefore, be
12+0
= 2
Lot for lot solution Summary
Month Ordering Cost Holding Cost Total Cost
Jan ₱40 ₱24 ₱64
Feb ₱40 ₱14.25 ₱54.25
March ₱40 ₱9 ₱49
April ₱40 ₱11.25 ₱51.25
May ₱40 ₱17.25 ₱57.25
June ₱40 ₱9 ₱49
Total ₱240 ₱84.75 ₱324.75
2. The monthly demand for an item over six (6) months is 32, 19, 12, 15, 23, and 12, units
respectively. Using the Part Period Balancing method, determine the total inventory cost if the
holding cost is ₱1.5 per unit per month and the ordering cost is ₱40 per order.
Iteration 1
Start the solution process by placing an order for 36 units in January.
Demand (kg) 32 19 12 15 23 12

end of January would be 0. The average inventory level in January would, therefore, be
32+0
= 2
In this case, the holding cost (₱24) is less than the order cost (₱40). Therefore, the next step would be to
set the order horizon to 2 months – January and February – and place one order at the beginning of
January that would meet the requirements for both January and February.
Iteration 1.2
The demand for January is 32 units, and that for February is 19 units. If an order of 51 units were placed
at the beginning of January, the following costs would be incurred:
Costs incurred for January and February
Holding cost Assuming the ordered quantity of 96 units would be received in full at the beginning of
January, the inventory level at the beginning of January is 96 units. The inventory level
at the end of January is 60 units. So, the average inventory level in January would be
51+19
= 2
The inventory level at the beginning of February would be 19 units, and at the end of February
would be 0. So, the average inventory level in February would be
19+0
= 2
The total holding cost for the months of January and February would, therefore, be:
= (35 + 9.5) × ₱1.5 = ₱66.75
At this point, the holding cost (₱66.75) has exceeded the cost of placing one order (₱40). Calculate the 𝐶𝑟
values:
For Iteration 1.1, the holding cost for ordering 32 units in January is ₱24 Thus, 𝐶𝑟 would be
𝐶𝑟 = |₱40 − ₱24| = ₱16
For Iteration 1.2, the holding cost for ordering 51 units in January is ₱66.75. Thus,
𝐶𝑟 = |₱40 − ₱66.75| = ₱26.75
It should be noted that in assessing 𝐶𝑟, it should be focused on comparing the difference between holding
cost and ordering cost; thus, the sign should be ignored.
Closeness factor for January-February order horizon

Parameters January January + February
𝐶𝑟 16 26.75
𝑄 32 51
As seen from closeness factor Table of January-February, 𝐶𝑟 for the lot size of 32 units is
smaller for the two (2) order horizons – January and January and February (or the total holding
cost is closer to the ordering cost). Therefore, conclude that it is economical to place an order for
32 units in January, which will help meet the demand for January alone.
Iteration 2
Since the demand for February was not included in the previous lot size, start a new iteration after setting
the starting period to February. The demand for February is 19 units.
Demand (kg) 32 19 12 15 23 12

19+0
= 2
The holding cost for February would be 9.5 × ₱1.5 or ₱14.25
The holding cost of ₱14.25 is less than the order cost of ₱40. Therefore, the next step is to set an order
horizon to two (2) months – February and March – and place an order at the beginning of February that
would meet the requirement for both these months.
Iteration 2.2
In this iteration, set the order horizon to two (2) months – February and March, and place an order for 31
units at the beginning of February.

Demand (kg) 32 19 12 15 23 12
Costs incurred for February and

March Type of cost Description
Holding cost Assuming the ordered quantity of 31 units is received in full at the beginning of February,
the beginning inventory level is 31 units. The inventory level at the end of February is 12
units. Thus, the average inventory level in February would be:
31+12
= 2
= 21.5𝑢𝑛𝑖𝑡𝑠
The inventory level at the beginning of March would be 12 units, and at the end of March would be 0.
So, the average inventory level in March would, therefore, be
12+0
= 2
The total holding cost for the months of February and March would, therefore, be
= (21.5 + 6) × ₱1.5 = ₱41.25
At this stage, the total holding cost of ₱41.25 has exceeded the order cost of ₱40. Thus, the 𝐶𝑟 values
need to be checked.
For Iteration 2.1, the holding cost for ordering 19 units in February is ₱14.25. Thus, 𝐶𝑟 would be
𝐶𝑟 = |₱40 − ₱14.25| = ₱𝟐5. 7𝟓
For Iteration 2.2, the holding cost for ordering 31 units in February is ₱21.5. Thus, 𝐶𝑟 would be
𝐶𝑟 = |₱40 − ₱21.5| = ₱18.5
Closeness factor for February - March order horizon
Parameters February February + March
𝐶𝑟 25.75 18.8
𝑄 19 31
As seen from Closeness factor Table of Feb-March , the 𝐶𝑟 for February is close to that of the
combined February and March order horizon; therefore, it is economical to place an order for 19 units
in February, which will help meet the demand for February only
Iteration 3
The demand for March was not included as part of the order placed in February. We, therefore, start a
new iteration after setting the initial period to March. The demand for March is 85 units.
Demand (kg) 32 19 12 15 23 12
Cost Incurred for March

Holding cost Assume that the ordered quantity will be received in full at the beginning of March. Thus,
the inventory level at the beginning of March would be 12 units, and that at the end of
March would be 0. The average inventory level in March would, therefore, be
12+0
= 2
The holding cost for March would be 6 × ₱1.5 or ₱9
The holding cost (₱9) is less than the order cost (₱40). Therefore, the next step is to set an order horizon
to 2 months – March and April – and place one order at the beginning of March, which would meet the
requirements for both these months.

Demand (kg) 32 19 12 15 23 12
Costs incurred for March and

April Type of cost Description
Holding cost Since we receive the ordered quantity of 27 units in full at the beginning of March,the
inventory level at the beginning of March is 27 units. The inventory level at the end
of March is 15 units. So, the average inventory level in March would be
27+15
= 2
The inventory level at the beginning of April would be 15 units, and at the end of April
would be 0. So, the average inventory level in April would, therefore, be
15+0
= 2
The total holding cost for the months of March and April would, therefore, be
= (21+ 7.5) × ₱1.5 = ₱42.75
Since the total holding cost has exceeded the order cost, check the 𝐶𝑟 values:
For Iteration 3.1, the holding cost for ordering 12 units in March is ₱9. Thus, 𝐶𝑟 would be
𝐶𝑟 = |₱40 − ₱9| = ₱31
For Iteration 3.2, the holding cost for ordering 27 units in March is ₱42.75. Thus, 𝐶𝑟 would be
𝐶𝑟 = |₱40 − ₱42.75| = ₱2.75
Closeness factor for March -April order horizon

Parameters March March +
April
𝐶𝑟 31 2.75
𝑄 12 27
As seen from above, the 𝐶𝑟 for the lot size of 27 units is smaller (meaning, the holding cost is closer to
the ordering cost); thus, it is economical to place an order for 27 units in March, which will help meet the
demand for March only.
Iteration 4
The demand for April was not included as part of the order placed in March. We, therefore, start a new
iteration after setting the initial period to April. The demand for April is 11 units.
Demand (kg) 32 19 12 15 23 12
Cost Incurred for April

Holding cost Assume that the ordered quantity will be received in full at the beginning of April. Thus,
the inventory level at the beginning of April would be 15 units, and that at the end of
April would be 0. The average inventory level in April would, therefore, be
15+0
= 2
The holding cost for April would be 7.5 × ₱1.5 or ₱11.25
The holding cost (₱11.25) is less than the order cost (₱40). Therefore, the next step is to set an order
horizon to 2 months – April and May – and place one order at the beginning of April that would meet the
requirements for both these months.
As seen from above, the 𝐶𝑟 for the lot size of 15 units is smaller (meaning, the holding cost is closer to
the ordering cost); thus, it is economical to place an order for 15 units in March, which will help meet the
demand for March only
Iteration 4.2
Demand (kg) 32 19 12 15 23 12
Costs incurred for April and
May Type of cost
Description
Holding cost Since we receive the ordered quantity of 38 units in full at the beginning of April, the
inventory level at the beginning of April is 38 units. The inventory level at the end of
April is 23 units. So, the average inventory level in April would be
38+23
= 2
The inventory level at the beginning of May would be 23 units, and at the end of May
would be 0. So, the average inventory level in May would, therefore, be
23+0
= 2
The total holding cost for the months of April and May would, therefore, be
= (30.5 + 11.5) × ₱1.5 = ₱63
Since the total holding cost has exceeded the order cost, check the 𝐶𝑟 values:
For Iteration 4.1, the holding cost for ordering 15 units in April is ₱11.25. Thus, 𝐶𝑟 would be
𝐶𝑟 = |₱40 − ₱11.25| = ₱28.75
For Iteration 4.2, the holding cost for ordering 38 units in April is ₱63. Thus,
𝐶𝑟 = |₱40 − ₱63| = ₱23
Closeness factor for April- May order horizon

Parameters April April + May
𝐶𝑟 28.75 23
𝑄 15 38
As seen from above, since the 𝐶𝑟 for the lot size of 38 units is smaller (meaning, the holding cost is closer
to the ordering cost), it is, therefore, economical to place an order for 38 units in April, which will help
meet the demand for April and May.
Iteration 5
Start a new iteration after setting the starting period to June
Demand (kg) 32 19 12 15 23 12
Cost Incurred for June

Holding cost Assume that the ordered quantity will be received in full at the beginning of June. Thus,
the inventory level at the beginning of June would be 12 units, and that at the end of June
would be 0. The average inventory level in June would, therefore, be
12+0
= 2
Total inventory cost The total inventory cost is ₱40 + ₱9 = ₱49
Solution Summary:
Month Order Quantity Ordering Cost Holding Cost Inventory Cost
Jan 32 ₱40 ₱24 ₱64
Feb 31 ₱40 ₱41.25 ₱81.25
March
April 38 ₱40 ₱63 ₱103
May
June 12 ₱40 ₱9 ₱49
TC ₱160 ₱137.25 ₱297.25
respectively. Using the Silver-Meal method, determine the total inventory cost if the holding cost
is ₱1.5 per unit per month and the ordering cost is ₱40 per order.
𝑂𝐶 ₱40 per order
𝐻 ₱1.5 per unit per period
Iteration 1.1
Demand (kg) 32 19 12 15 23 12
Costs incurred for January

Type of cost
Description
Holding cost Assume that the ordered quantity will be received in full at the beginning of
January. Thus, the inventory level at the beginning of January would be 32 units,
and that at the end of January would be 0. The average inventory level in January
would, therefore, be
32+0
= 2
Total inventory cost The total inventory cost is ₱40 + ₱24 = ₱64
Per Period Cost (PPC) Since this cost is incurred over one period (January), the PPC is
₱64
= 1
= ₱64
Iteration 1.2
The next step would be to set an order horizon to 2 months – January and February – and place one order
at the beginning of January that would meet the requirements for both these months.
Demand (kg) 32 19 12 15 23 12
Costs incurred for January and

February Type of cost Description
Holding cost Assuming the ordered quantity of 96 units would be received in full at the
beginning of January, the inventory level at the beginning of January is 51 units.
The inventory level at the end of January is 19 units. So, the average inventory level
in January would be
52+19
= 2
The inventory level at the beginning of February would be 19 units, and at the end
of February would be 0. So, the average inventory level in February would be
19+0
= 2
= (35+9.5) x ₱ 1.5 = ₱ 66.75
Total inventory cost ₱ 40 + ₱66.75 = ₱ 106.75
Per Period Cost (PPC) Since this cost is incurred over two (2) periods (January and February), the PPC
is
₱ 106.75
= 2
= ₱ 53. 38
Since the PUC for the order horizon of January and Feb took together is less than the PUC for the order
horizon for January alone, continue this iteration by combining the demand for January, February and
March, in one order, placed at the beginning of January. The total demand for January, February and
March is 63 units.
Iteration 2.1
Set the order horizon to February since the demand for this month was not included in the previous order.
Demand (kg) 32 19 12 15 23 12
Cost incurred for January, February,

March Type of cost Description
Holding cost Since we receive the ordered quantity of 63 units in full at the beginning of
January, the inventory level at the beginning of March is 63 units. The inventory
level at the end of March is 31 units. So, the average inventory level in March
would be
63+31
= 2
The inventory level at the beginning of February would be 31 units, and at the end of April is 12 units.
So, the average inventory level in April Would be:
31+12
= 2
= 21.5 units
The inventory level at the beginning of Mar would be 23 units, and at the end of
March would be 0. So, the average inventory level in March would, therefore, be
12+0
= 2
= 6 units
The total holding cost for the months of March and April would, therefore, be
= (47 + 21.5+ 6) x ₱1.5 = ₱ 111.75
Total inventory cost is 40+ 111.75= 151.75
Per unit cost is = 151.75 3
=50.58
Since the PUC for the order horizon of January and Feb took together is less than the PUC for the order
horizon for January alone, continue this iteration by combining the demand for January, February and
March, in one order, placed at the beginning of January. The total demand for January, February and
March is 63 units.

Demand (kg) 32 19 12 15 23 12
Costs incurred for April

Type of cost
Description
Holding cost Assuming the ordered quantity of 15 units will be received in full at the
beginning of March, the inventory level at the beginning of March is 15 units.
The inventory level at the end of March is 0 units. Thus:
5+0
= 2
The total holding cost for March would, therefore, be:
= 7.5 × ₱1.5 = ₱11.25
The total inventory cost is ₱40 + ₱11.25 = ₱51.25
The Per Unit Cost (PC) is
₱51.25
= 1
= ₱51.25units

Demand (kg) 32 19 12 15 23 12
Costs incurred for April and

May Type of cost
Description
Holding cost Assuming the ordered quantity of 38 units will be received in full at the beginning
of April, the inventory level at the beginning of April is 38 units. The inventory level
at the end of May is 23 units. Thus:
38+23
= 2
The inventory level at the beginning of May would be 23 units, and at the end of May would be 0.
So, the average inventory level in May would, therefore, be
23+0
= 2
The total holding cost for the months of March and April would, therefore, be:
= (30.5 + 11.5) × ₱1.5 = ₱63
The total inventory cost is ₱40 + ₱63 = ₱103
Per Unit Cost (PUC) Since this cost is incurred over two periods (March and April), the Per Unit Cost
(PC) is
₱103
= 2
= ₱51.5

Demand (kg) 32 19 12 15 23 12
Costs incurred for May
Type of cost
Description
of May the inventory level at the beginning of March is 23 units. The inventory level at
the end of March is 0 units. Thus:
23 + 0
= 2
= 11.5 × ₱1.5 = ₱17.25
The total demand is 23units. The Per Unit Cost (PC) is
₱57.25
= 1
= ₱57.25

Demand (kg) 32 19 12 15 23 12
Costs incurred for May and

June Type of cost
Description
of March, the inventory level at the beginning of March is 35 units. The inventory
level at the end of March is 112 units. Thus:
35+12
= 2
The inventory level at the beginning of June would be 12 units, and at the end of June would be 0.
So, the average inventory level in June would, therefore, be
12+0
= 2
= (23.5 + 6) × ₱1.5 = ₱44.25
Since this cost is incurred over two periods (March and April), the Per Unit Cost
(PC) is
₱84.25
= 2
= ₱42. 13

Demand (kg) 32 19 12 15 23 12
Costs incurred for June

Type of cost
Description
Holding cost Since we receive the ordered quantity of 12 units in full at the beginning of
June, the inventory level at the beginning of June would be 12 units, and at the
end of June, would be 0. So, the average inventory level in March would,
therefore, be
12+0
= 2
The holding cost for April would be 6 × ₱1.5 or ₱9
Per Period Cost (PPC) is,
₱49
= 1
= ₱ 49
Solution Summary:
Jan 63 ₱40 ₱111.75 ₱151.75
Feb
March
April 15 ₱40 ₱63 ₱51.25
May 35 ₱40 ₱44.25 ₱ 84.25
June
TC 113 ₱120 ₱219 ₱287.25
respectively. Using the least unit cost method, determine the total inventory cost if the holding cost
is ₱1.5 per unit per month and the ordering cost is ₱40 per order.

Demand (kg) 32 19 12 15 23 12
32+0
= 2
= ₱16 units
The holding cost for January would be 16 × ₱1.5 or ₱24.00
The total demand for this period is 36 units. The Per Unit Cost (PC) is
64
= 32
= ₱2 units
The next step would be to set an order horizon to two (2) months – January and February – and place one
order at the beginning of January that would meet the requirements for both these months.

Demand (kg) 32 19 12 15 23 12
January, the inventory level at the beginning of January is 51 units. The inventory level
at the end of January is 19 units. So, the average inventory level in January would be
51+19
= 2
= ₱35 units
The inventory level at the beginning of February would be 19 units, and at the end of
February would be 0. So, the average inventory level in February would be
19+0
= 2
= ₱9.5 units
= (35 + 9.5) × ₱1.5 = ₱66.75
106.75
= 51
= ₱2.09 units

Demand (kg) 32 19 12 15 23 12
19+0
= 2
= ₱9.5 units
The holding cost for January would be 9.5× ₱1.5 or ₱14.25
54.25
= 19
= ₱2.86 units
Cost Incurred for February and March
Demand (kg) 32 19 12 15 23 12
February, the inventory level at the beginning of February is 31 units. The inventory
level at the end of February is 12units. So, the average inventory level in February would
be
31+12
= 2
= ₱21.5 units
The inventory level at the beginning of February would be 19 units, and at the end of February would be
0. So, the average inventory level in February would be
12+0
= 2
= ₱6 units
= (21.5 + 6) × ₱1.5 = ₱41.25
81.25
= 31
= ₱2.62 units
The PUC for order horizon January-February-March is greater than the PUC for the two-period order
horizon of January-February. Therefore, the optimal order quantity is the sum of the order quantities for
January and February, which is 51 units.
Cost incurred for April

Demand (kg) 32 19 12 15 23 12
Holding cost Assuming the ordered quantity of 15 units will be received in full at the beginning of
April, the inventory level at the beginning of April is 15 units. The inventory level at
the end of April is 0 units. Thus,
15+0
= 2
= ₱7.5 units
= 7.5 × ₱1.5 = ₱11.25
The total inventory cost is ₱40 + ₱11.25= ₱51.25
The total demand is 15 units. The Per Unit Cost (PC) is
51.25
= 15
= ₱3.42 units
Cost incurred for April and May
Demand (kg) 32 19 12 15 23 12
April, the inventory level at the beginning of April is 38 units. The inventory level at
the end of April is 23units. So, the average inventory level in February would be
38+23
= 2
= ₱49.5 units
The inventory level at the beginning of February would be 23 units, and at the end of February would be
0. So, the average inventory level in February would be
23+0
= 2
= ₱11.5 units
= (49.5 + 11.5) × ₱1.5 = ₱91.5
131.5
= 38
= ₱3.46 units
Cost incurred for May
Demand (kg) 32 19 12 15 23 12
23+0
= 2
= ₱11.5units
The holding cost for January would be 11.5 × ₱1.5 or ₱17.25
57.25
= 23
= ₱2.49 units
Cost incurred for May and June

Demand (kg) 32 19 12 15 23 12
Holding cost Assuming the ordered quantity of 35 units will be received in full at the beginning of
May, the inventory level at the beginning of May is 35 units. The inventory level at
the end of May is 12 units. Thus:
35+12
= 2
= ₱23.5 units
The inventory level at the beginning of June would be 12 units, and at the end of June would be 0.
So, the average inventory level in June would, therefore, be
12+0
= 2
= ₱6units
= (23.5 + 6) × ₱1.5 = ₱44.25
Since this cost is incurred over two periods (May and June), the Per Unit Cost (PC) is
84.25
= 25
= ₱ 2.41 units
Solution Summary:
Jan 32 ₱40 ₱24 ₱64
Feb 31 ₱40 ₱41.25 ₱81.25
March
April 15 ₱40 ₱11.25 ₱51.25
May 35 ₱40 ₱44.25 ₱84.25
June
TC 113 ₱160 ₱120.75 ₱280.75

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Sotero, Maria Bernaditte L.

𝑂𝐶 ₱40 per order 𝐻 ₱1.5 per unit per period

Cost Incurred for January

Cost Incurred for February

Cost Incurred for March

Cost Incurred for April

Cost Incurred for May

Cost Incurred for June

Cost Incurred for January

Closeness factor for January-February order horizon

Cost Incurred for February

Month Jan Feb March April May June

Costs incurred for February and

Cost Incurred for March

Month Jan Feb March April May June

Costs incurred for March and

Closeness factor for March -April order horizon

Cost Incurred for April

Closeness factor for April- May order horizon

Cost Incurred for June

Costs incurred for January

Costs incurred for January and

Cost incurred for January, February,

Month Jan Feb March April May June

Costs incurred for April

Month Jan Feb March April May June

Costs incurred for April and

Month Jan Feb March April May June

Month Jan Feb March April May June

Costs incurred for May and

Month Jan Feb March April May June

Costs incurred for June

Month Jan Feb March April May June

Month Jan Feb March April May June

Cost Incurred for February

Cost incurred for April

Cost incurred for May and June

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