Chapter-13

PRACTICE PROBLEM
Example-1

 A local distributor for a national tire company expects to sell

approximately 9,600 steel-belted radial tires of a certain size and
tread design next year. Annual carrying cost is $16 per tire, and
ordering cost is $75. The distributor operates 288 days a year.
 What is the EOQ?
 How many times per year does the store reorder?
 What is the length of an order cycle (time between orders)?
 What is the total annual cost if the EOQ quantity is ordered?
Example-1-Solution
Exercise-3

 D= 1215, S=10, H=75, EOQ = SQRT((2X1215X10)/75) = 18

 B) Avg. inventory = 18/2 = 9
 C) No of order = 1215/18 = 67.5 = 68
 D) TC = (18/2)X75 + (1215/18)X10 = 675 + 675 = 1350
 E) H= 75 +9 = 84 , EOQ = SQRT (2X1215X10)/84) = 17,
 NEW TC= (17/2)X84 + (1215/17)X10 = 714 + 714 = 1428

 Difference = 1428 – 1350 = 78

Example-2

Piddling Manufacturing assembles security monitors. It

purchases 3,600 black-and-white cathode ray tubes a year at
$65 each. Ordering costs are $31, and annual carrying costs
are 20 percent of the purchase price. Compute the optimal
quantity and the total annual cost of ordering and carrying
the inventory.
Example-2: Solution
Example-3

A toy manufacturer uses 48,000 rubber wheels per year for its popular dump
truck series. The firm makes its own wheels, which it can produce at a rate of
800 per day. The toy trucks are assembled uniformly over the entire year.
Carrying cost is $1 per wheel a year. Setup cost for a production run of
wheels is $45. The firm operates 240 days per year. Determine the:
 Optimal run size
 Minimum total annual cost for carrying and setup
 Cycle time for the optimal run size
 Run time
Example-3: Solution
 Exercise-9

Given, D= 250X300 = 75000, p= 5000, u= 250, S=66, H=0.45

EPQ = SQRT((2X75000X66)/0.45)XSQRT((5000/(5000-250)) = 4690.41X 1.026 = 4812.36

Number of runs = 75000/4812 = 15.58

It takes 1 day to produce optimal run quantity

Example-4

The maintenance department of a large hospital uses about

816 cases of liquid cleanser annually. Ordering costs are
$12, carrying costs are $4 per case a year, and the new price
schedule indicates that orders of less than 50 cases will cost
$20 per case, 50 to 79 cases will cost $18 per case, 80 to 99
cases will cost $17 per case, and larger orders will cost $16
per case. Determine the optimal order quantity and the total
cost.
  The 70 cases can be bought at $18 per case because 70 falls in the range of 50
to 79 cases. The total cost to purchase 816 cases a year, at the rate of 70 cases
per order, will be

 Because lower cost ranges exist, each must be checked against the
minimum cost generated by 70 cases at $18 each. In order to buy at $17
per case, at least 80 cases must be purchased. (Because the TC curve
is rising, 80 cases will have the lowest TC for that curve's feasible
region.) The total cost at 80 cases will be

 To obtain a cost of $16 per case, at least 100 cases per order are
required, and the total cost at that price break will be
 Order Quantity Total Cost
70 14,968
80 14,154
100 13,354

100 cases per order yields the lowest total cost, 100 cases is
the overall optimal order quantity.

With Quantity Discounts, purchase quantity will be equal to or

greater optimal economic quantity.
 2 DS 2(annual demand)(or der cost)
QO  
Exercise no 3 H annual per unit holding cost

A bakery buys flour in 25-pound bags. The bakery uses 1,215 bags a year.
Ordering cost is $10 per order. Annual carrying cost is $75 per bag.
 a. Determine the economic order quantity.
Q D
 b. What is the average number of bags on hand? TC  H  S
 2 Q
c. How many orders per year will there be?
 d. Compute the total cost of ordering and carrying flour.
 e. If holding costs were to increase by $9 per year, how much would that
affect the minimum total annual cost?
Exercise no 13
D= 18000, H= 0.60, S=96
EOQ = SQRT((2X18000X96)/0.60)= 2400, TC = (2400/2)X0.60 + (18000/2400)X96 + 1.20X18000 = 720+720+21600 =
23040

If the order size is 5000 unit, 14172

TC= (5000/2)X0.6+(18000/5000)X96 + 1.15X18000 = 1500 + 345.6+20700 = 22545.6

If the order size is 10000 unit,

TC = (10000/2)X0.6+(18000/10000)X96+1.10X18000=3000+172.8+19800 = 22972.8
 ROP

The Problem 4housekeeping department of a motel uses approximately 400

washcloths per day. The actual number tends to vary with the number of guests
on any given night. Usage can be approximated by a normal distribution that has
a mean of 400 and a standard deviation of nine washcloths per day. A linen
supply company delivers towels and washcloths with a lead time of three days. If
the motel policy is to maintain a stockout risk of 2 percent, what is the minimum
number of washcloths that must be on hand at reorder time, and how much of
that amount can be considered safety stock?
ROP: Solution
 ROP  d  LT  zd LT
where
z  Number of standard deviations

ROP: LT Variability d  Demand per period (per day, per week)

 LT  The stddev. of lead time (same time units as d )
LT  Average lead time (same time units as d )

ROP for constant demand and variable lead time. The motel in the preceding
example uses approximately 600 bars of soap each day, and this tends to be
fairly constant. Lead time for soap delivery is normally distributed with a
mean of six days and a standard deviation of two days. A service level of 90
percent is desired.
a. Find the ROP.
b. How many days of supply are on hand at the ROP?
ROP: Solution