INVENTORY MANAGEMENT WORKSHEET
QUESTION 1 :
The soft goods department of a large department store sells 175 units per month of a
certain large bath towel. The unit cost of a towel to the store is R2.50 and the cost of
placing an order has been estimated to be R12.00. The store uses an inventory
carrying charge of 27% per unit cost per year. Determine the optimal order quantity,
order frequency (number of orders placed per year), total annual holding cost, and
the annual cost of inventory management. If, through automation of the purchasing
process, the ordering cost can be cut to R4.00, what will be the new economic order
quantity, order frequency, and annual inventory management cost? Assume an
eleven month working year.
QUESTION 2 :
Paul’s machine shop uses 2 500 brackets during the course of a year, and this
usage is relatively constant throughout the year. These brackets are purchased from
a supplier 100km away for R15 each, and the lead time is 2 days. The holding costs
per bracket is 10% of the unit cost and the ordering cost per order is R18,75. There
are 250 working days per year.
2.1. What is the EOQ? (2)
2.2. Calculate the expected number of orders. (2)
2.3. Calculate the expected time between orders. (2)
2.4. What is the reorder point? (2)
2.5. Calculate the total annual material costs. (2)
2.6. Calculate the total annual inventory cost. (2)
QUESTION 3 : [12 MARKS]
Thomas Kratzer is the purchasing manager for the headquarters of a large insurance
company chain with a central inventory operation. Thomas’s fastest moving
inventory item has a demand of 6000 units per year. The cost of each unit is R100,
and the inventory carrying cost is 10% of cost price. The average ordering cost is
R30 per order. It takes about 5 days for an order to arrive. This is a corporate
operation, and there are 250 working days per year.
3.1. What is the EOQ? (2)
3.2. What is the optimal number of orders per year? (2)
3.3. What is the optimal number of days in between any two orders? (2)
3.4. What is the total annual cost of ordering inventory? (2)
3.5. What is the total annual cost of holding inventory? (2)
3.6. What is the total annual inventory cost, including cost of the 6000 units?
(2)
QUESTION 4 :
Southeastern Bell stocks a certain switch connector at its central warehouse for
supplying field offices. The demand for these connectors is 150 units per day.
Southeastern estimates its annual holding costs for this item to be R25,00 per unit.
The cost to place and process an order from the supplier is R75,00. The company
operates 300 days per year and the lead time to receive an order from the supplier is
8 working days. The cost of one switch connector is R12,50.
a) Find the economic order quantity. (2)
b) Find the reorder point. (2)
c) Find the average time between orders. (2)
d) Find the number of orders placed per year. (2)
e) Find the total material costs per year. (2)
f) Find the total annual inventory cost. (2)