Question 1: [10 marks]

Lingnan Bakery (LB) uses at a steady rate of 100 kilograms of butter to produce bread every day. The cost to order
butter from a supplier is $50 per order and the annual holding costs of the butter is $H per kilogram. Consider LB
operates 360 days per year.
a. If LB orders 500 kilograms of butter each time and spends $5000 on ordering and holding the butter annually, show that
the annual holding costs of the butter per kilogram H is $5.6 per kilogram per year. [2 marks]
b. Will you advise LB to adopt the EOQ to order the butter? Justify your answer. [8 marks]

Question 2: [15 marks]

Reconsider question 1:
Suppose LB can get the butter from a supplier with the following price scheme, determine the optimal order
quantity in kilograms of butter and the optimal annual total cost.

Weight in Kilograms Unit Price

1 to 499 $10.0
500 to 999 $9.5
1000 or more $8.0

Question 3: [12 marks]

Lingnan Barkey (LB) sells egg tarts. Historically, LB has observed that hourly demand of egg tarts is normally
distributed with a mean of 100 units and a standard deviation of 10 units. The baking time of egg tarts (lead time)
appears normally distributed with a mean of 0.5 hours and a standard deviation of 0.1 hours. LB aims to limit the
stock out risk during lead time to 10 percent.
When should LB start to bake a new batch of egg tarts?

Question 4: [13 marks]

Lingnan Bakery (LB) also makes cream cakes. Cream cakes cost $75 each to make, and LB sells for $250 each. Every day,
2 hours before the bakery is closed, those unsold cream cakes are reduced to half-price of the regular price of
$250 and typically 50% of those are sold. Any that unsold on the day are discarded. The daily demand of
cream cakes can be approximated by a normal distribution with µ = 50 cakes and s = 5 cakes.
a. What inventory model should be used to determine the quantity of cream cakes prepared daily in order to maximize the
total expected daily profit? Why? [3 marks]
b. What is the critical ratio (optimal service level)? [5 marks]
c. How many cream cakes should be prepared daily to maximize the total daily expected profit of this product?
[5 marks]
End of Assignment 3