Illustrative Problems Inventory Management

1. A local distributor for a national tire company expects to sell approximately 9,600 steel-belted radial
tires of a certain size and thread design next year. Annual carrying cost is P16 per tire, and ordering
cost is P75. The distributor operates 288 days a year.
a. What is the EOQ?
b. How many times per year does the store reorder?
c. What is the length of an order cycle?
d. What is the total annual cost if the EOQ is ordered?
2. Johnson is attempting to perform an inventory analysis on one of his most popular products. Annual
demand for this product is 5,000 units; unit cost is P200; carrying cost is considered to be
approximately 25% of the unit price. Order costs for his company typically run nearly P30 per order
and lead time averages 10 days. Assuming that there are 200 working days in a year and that demand
and lead time are also constant, what is the reorder point?
3. The ePaint Store has its own manufacturing facility in which it produces Ironcoat paint. The cost of
setting up the production process to make paint is P150. Annual holding cost per gallon is P0.75 and
demand is 10,000 gallons per year. The manufacturing facility operates 311 days and produces 150
gallons of paint per day. Determine
a. Optimal order size
b. Total inventory cost
c. Length of time to receive an order
d. Number of orders per year
e. Maximum inventory level
4. Happy Pet, Inc., a large pet store, buys Everlast Leader, a leather lead for dogs at P7 each. There is an
annual demand for 6,000 Everlast Leaders. The manager of Happy Pet has determined that the
ordering cost is P20 per order, and the carrying cost as a percentage of the unit cost is 15%. Happy Pet
is now considering a new supplier of Everlast Leaders. Each lead would cost only 6.65; but in order to
get this discount, Happy Pet would have to buy shipments of 3,000 Everlast Leaders at a time. Should
the store shift to the new supplier?
5. Avtek, a distributor of audio and video equipment, wants to reduce a large stock of televisions. It has
offered a local chain of stores a quantity discount pricing schedule as follows:

Quantity Price

1-49 1400

50-89 1100

90+ 900

The annual carrying cost for the stores for a TV is P190, the ordering cost is P2500, and annual demand
for this particular model is estimated to be 200 units. The chain wants to determine if it should take
advantage of this discount or order the basic EOQ order size.