Exercise for Chapter 6

1. Amy has determined that the annual demand for Number 6 screws is
100,000 screws. Amy, who works in her brother’s hardware store, is in
charge of purchasing. She estimates that it costs $10 every time an order is
placed. This cost includes her wages, the costs of the forms used in placing
the order, and so on. Furthermore, she estimates that the cost of carrying one
screw in inventory for a year is one-half of 1 cent. Assume that the demand
is constant throughout the year.
A. How many number 6 screws should Amy order at a time if she wishes to
minimize total inventory cost?

D = 100,000; Co = $10; Ch = $0.005

B. How many orders per year would be placed? What would the annual
ordering cost be?

Total ordering cost = 5($10) = $50 per year

C. What would the average inventory be? What would the annual holding cost
be?
Average Inventory

Total/Annual holding cost = 10,000 x (0.005) = $50 per year

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2. It takes approximately 8 working days for an order of number 6 screws to
arrive once the order has been placed. (Refer to question 1). The demand for
number 6 screws is fairly constant, and on the average, Amy has observed
that her brother’s hardware store sells 500 of these screws each day. Because
the demand is constant, Amy believes that she can avoid stockouts
completely if she only orders the number 6 screws at the correct time. What
is the ROP?

ROP = 8 days x (500 screws/day) = 4,000 number 6 screws

3. West valves sell industrial valves and fluid control devices. One of the most
popular valves is the U20 valves, with an annual demand of 4,000 units. The
cost of each valves is $90 and the inventory carrying cost is estimated to be
10% of the cost of each valves. The ordering cost is $25 per order. It takes
two weeks for an order to arrive from the supplier and during this time the
demand per week for West valves is 80.
A. What is the EOQ?
D = 4,000 units
Ch = 10% of $90 = $9
Co = $25

B. What is the ROP?

ROP = d x L = (80 per week) x (2 weeks) × = 160

C. Is the ROP greater than the EOQ? If so, how is the situation handled?
D. What is the average inventory? What is the annual holding cost?

Average inventory
Total holding cost = 74.5(9) = $670.50 per year
Number of orders per year

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 Total ordering cost = 26.85($25) = $671.25 per year

4. Fancy Shoes is a local retail shoe stores located in Jeddah. Annual demand
for a popular sandal is 500 pairs, and Kathy the owner, has been in the habit
of ordering 100 pairs at time. Kathy estimates that the ordering cost is $10
per order. The cost of the sandal is $5 per pair. What would the carrying cost
as a percentage of the unit cost have to be? If the carrying cost were 10% of
the cost, what would the optimal order quantity be?
D = 500 sandals; Co = $10
If Q* = 100,

Ch = $1, which is 20% of cost.

If Ch = 10% of $5 = $0.50,

5. Ross White’s machine shop uses 2500 brackets yearly. These brackets are
purchased from a supplier for $15 each, and the lead time is 2 days. The
holding cost per bracket per year is $2.50 (or 10% of the unit cost) and the
ordering cost is $18.75. There are 250 working days per year.

a. What is the EOQ?

b. Given the EOQ, what is the average inventory? What is the annual
inventory holding cost?

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 Average inventory

Annual holding cost

c. In minimizing cost, how many orders would be made each year? What
would be the annual ordering cost?

Number of orders per year

Annual ordering cost

d. Given the EOQ, what is total annual inventory cost (including purchase
cost)? What is the annual inventory holding cost?
Total cost = $187.5 + $187.5 + 2500(15) = $37,875

e. What is the time between orders?

With 250 days per year, and 10 orders per year, the number of days
between orders = 250/10 = 25 days.

f. What is the ROP?

ROP = d × L = (2500 units per year/250 days per year) × 2 = 20 units

6. Below is data on Inventory for XYZ Company. Using the ABC Analysis
method, determine the category of the inventories below.

Inventory Demand(units) Price Total Category

Item 1 20,000 10.00 20,000 x 10 = $200,000 B
Item 2 8,000 100.00 8,000 x 100 = $800,000 A

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Item 3 7,000 5.00 7000 x 5 = $35,000 C
Item 4 200 5.00 200 x 5 = $1000 C
7.