02 - Order Quantities When Demand is

Approximately Level
1. A firm can produce and package their own guitar strings or buy prepacked rolls of “discount” guitar
strings. If they load their own strings, there is a production setup cost of $20. The finished product
is valued at $1.23 a set, and the production rate is 500 sets/day. “Discount” strings cost the firm
$1.26 per set and the fixed ordering charge is $3/order. In either case, an inventory carrying charge
of 0.24 $/$/year would be used by the company. Demand for this item is 10,000 sets per year.
From the standpoint of replenishment and carrying costs, what should the company do? What
other considerations might affect the decision?

2. A manufacturing firm located in Calgary produces an item in a 3-month time supply. An analyst,
attempting to introduce a more logical approach to selecting run quantities, has obtained the
following estimates of the characteristics of the item:
D = 4,000 units/year
A = $5
v = $4 per 100 units
r = 0.25 $/$/year
Note: Assume that the production rate is much larger than D.
a. What is the EOQ of the item?
b. What is the time between consecutive replenishments of the item when the EOQ is used?
c. The production manager insists that the A = $5 figure is only a guess. Therefore, he insists on
using his simple 3-month supply rule. Indicate how you would find the range of A values for
which the EOQ (based on A = $5) would be preferable (in terms of a lower total of
replenishment and carrying costs) to the 3-month supply.

3. A particular product is produced on a fabrication line. Using the finite replenishment EOQ model,
the suggested run quantity is 1,000 units. On a particular day of production, this item is being run
near the end of a shift and the supervisor, instead of stopping at 1,000 units and having to set up
for a new item (which would make her performance look bad in terms of the total output),
continues to produce the item to the end of the shift, resulting in a total production quantity of
2,000 units. Discuss how you would analyse whether or not she made a decision that was
attractive from a company standpoint. Include comments on the possible intangible factors.

4. Consider an item whose demand rate is 100 units per year and that costs $40 per unit. If the fixed
cost of ordering is $50 and the carrying charge is 25%, answer the following:
a. Find the EOQ.
b. The purchasing manager is trying to understand the reasons for the high cost of ordering.
In this process, she wonders how low A must become for the EOQ to equal 1 unit. What value of
A will she find?

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5. The Andy Dandy Candy Company has asked you to recommend an EOQ for their Jellybean product.
They have provided you with the following information:
a. The only costs involved are the cost of ordering and the cost of holding the inventory that
is equal to the average amount of capital times $0.30. Back orders are not allowed, and
there are no other costs.
b. The company always has a sale when a shipment of Jellybeans arrives, until half of the
shipment is gone, at which time the company raises its price.
This implies that there are two known, continuous, constant rates of demand D2 and D1, D1 being
the rate during the sale, with D1 > D2. As a consultant, you are requested to recommend an EOQ
formula for this situation. In your report, you must specifically cover the following points:
a. A graphical representation of the inventory process. (What is the fraction of time spent at the
rate D1?)
b. A total cost equation, defining the terms.
c. A brief explanation of the method of obtaining the optimal order quantity.
d. A numerical example using A = $20; vr = $2; D1 = 30; and D2 = 15.
e. How much should be ordered in the above numerical example if D1 = D2 = 30?

6. A supplier offers the following discount structure on purchases of any single item:

The discounts apply to all units. For each of the following items treated separately, what is the
appropriate order quantity to use, assuming a common value of r = 0.30 $/$/year?

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