Questions for MS1 - Inventory Models
Question 1
The XYZ Company purchases a component used in making automobile generators,
directly from the supplier. XYZ’s generator production operation, which is operated
at a constant rate, will need 1000 components per month. Assume that ordering costs
are £25 per order, the unit purchasing cost is £2.50 per component, and that the annual
holding costs are charged at 20% of the unit purchase cost per component. There are
250 working days per year and the lead time is 5 days. Answer the following
inventory policy questions for XYZ.
a) What is the EOQ for this component?
b) What is the reorder point?
c) What are the total holding and ordering costs associated with your
recommended EOQ?
Question 2
Suppose that XYZ’s management in Question 1 likes the operational efficiency of
ordering once each month and in quantities of 1000 units. How much more expensive
would this be than your EOQ recommendation? Would you recommend in favour of
the 1000 unit order quantity? Explain. What would the reorder point be if the 1000
unit quantity were acceptable?
Question 3
Apply the EOQ model to the following quantity discount situation where D = 500
units per year, S = £40 per order and H = 20% of unit purchase price per year.
Discount Category Order Size Discount (%) Unit Cost
1 0-99 0 £10.00
2 100 or more 3 £9.70
What order quantity do you recommend?
Question 4
An item of inventory has constant demand of 2500 units a year. It costs £500 to
set up each production run and the variable cost is £30 per unit. Holding costs are
20% of value per year and the production rate is 10000 units per year. There is a
lead time of 2 months from receiving a production requisition until finished units
begin to come from the production line. Find the optimal batch size and reorder
level (assuming shortages are not allowed).
Question 5
Wilson Publishing Company produces books for the retail market. Demand for a
current book is expected to occur at a constant annual rate of 7200 copies. The cost of
one copy of the book is £14.50. The holding cost is based on an 18% annual rate, and
production setup costs are £150 per setup. The equipment on which the book is
produced has an annual production volume of 25000 copies. Wilson has 250 working
days per year, and the lead time for a production run is 15 days. Use the production
lot size model to compute the following values:
i. Minimum cost production lot size
ii. Number of production runs per year
iii. Cycle time
iv. Length of a production run
v. Maximum inventory
vi. Total annual cost
vii. Reorder point.
Question 6
i. For the basic EOQ model, what are the two types of costs included in the total
variable cost that impact on the optimal value of Q? What is the relationship
between these two costs at the point where the order quantity equals its
optimal value?
ii. Does the optimal order quantity increase or decrease if the demand rate is
increased? If the order cost is increased? If the unit holding cost is increased?
In each case, what is the intuitive explanation?
iii. Can the optimal order quantity change fairly significantly if a fairly small (say
10%) change is made in either the order cost or the unit holding cost? How
about if the change is made in both costs in opposite directions?
iv. What happens to the optimal order quantity if both the order cost and unit
holding cost are changed by the same percentage amount in the same
direction?