Problems from

Chapter 6 – Inventory Control Models

6-18 Lila Battle has determined that the annual demand for number-6 screws is
100,000 screws. Lila, who works in her brother’s hardware store, is in charge of
purchasing. She estimates that it costs $10 every time an order is placed. This cost
includes her wages, the cost of the forms used in placing the order, and so on.
Furthermore, she estimates that the cost of carrying one screw in inventory for a
year is one half of 1 cent. Assume that the demand is constant throughout the
year.

(a) How many number-6 screws should Lila order at a time if she wishes to
minimize total inventory cost?
(b) How many orders per year would be placed? What would the annual ordering
cost be?
(c) What would the average inventory be? What would the annual holding cost
be?

6-19 it takes approximately 8 working days for an order of number-6 screws to

arrive once the order has been placed. (Refer to Problem 6-18.) The demand for
number-6 screws is fairly constant, and on the average, Lila has observed that her
brother’s hardware store sells 500 of these screws each day. Because the demand
is fairly constant, Lila believes that she can avoid stockouts completely if she only
orders the number-6 screws at the correct time. What is the ROP?

6-20 Lila’s brother believes that she places too many orders for screws per year.
He believes that an order should be placed only twice per year. If Lila follows her
brother’s policy, how much more would this cost every year over the ordering
policy that she developed in Problem 6-18? If only two orders were placed each
year, what effect would this have on the ROP?
6-25 Ross White’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 100 miles away for $15 each, and the lead time is 2
days. The holding cost per bracket per year is $1.50 (or 10% of the unit
cost) and the ordering cost per order is $18.75. There are 250 working days per
year.

(a) What is the EOQ?

(b) Given the EOQ, what is the average inventory? What is the annual inventory
holding cost?
(c) In minimizing cost, how many orders would be made each year? What would
be the annual ordering cost?
(d) Given the EOQ, what is the total annual inventory cost (including purchase
cost)?
(e) What is the time between orders?
(f) What is the ROP?

6-26 Ross White (see Problem 6-25) wants to reconsider his decision of buying
the brackets and is considering making the brackets in-house. He has determined
that setup costs would be $25 in machinist
time and lost production time, and 50 brackets could be produced in a day once
the machine has been set up. Ross estimates that the cost (including labor time
and materials) of producing one bracket would be $14.80. The holding cost would
be 10% of this cost.

(a) What is the daily demand rate?

(b) What is the optimal production quantity?
(c) How long will it take to produce the optimal quantity? How much inventory is
sold during this time?
(d) If Ross uses the optimal production quantity, what would be the maximum
inventory level? What would be the average inventory level? What is the annual
holding cost?
(e) How many production runs would there be each year? What would be the
annual setup cost?
(f) Given the optimal production run size, what is the total annual inventory cost?
(g) If the lead time is one-half day, what is the ROP?
6-27 Upon hearing that Ross White (see Problems 6-25 and 6-26) is considering
producing the brackets in-house, the vendor has notified Ross that the purchase
price would drop from $15 per bracket to $14.50 per bracket if Ross will purchase
the brackets in lots of 1,000. Lead times, however would increase to 3 days for
this larger quantity.

(a) What is the total annual inventory cost plus purchase cost if Ross buys the
brackets in lots of 1,000 at $14.50 each?
(b) If Ross does buy in lots of 1,000 brackets, what is the new ROP?
(c) Given the options of purchasing the brackets at $15 each, producing them in-
house at $14.80, and taking advantage of the discount, what is your
recommendation to Ross White?

6-29 Douglas Boats is a supplier of boating equipment for the states of Oregon
and Washington. It sells 5,000 White Marine WM-4 diesel engines every year.
These engines are shipped to Douglas in a shipping container of 100 cubic feet,
and Douglas Boats keeps the warehouse full of these WM-4 motors. The
warehouse can hold 5,000 cubic feet of boating supplies. Douglas estimates that
the ordering cost is $10 per order, and the carrying cost is estimated to be $10
per motor per year. Douglas Boats is considering the possibility of expanding the
warehouse for the WM-4 motors. How much should Douglas Boats expand, and
how much would it be worth for the company to make the expansion? Assume
demand is constant throughout the year.

6-31 Lisa Surowsky was asked to help in determining the best ordering policy for
a new product. Currently, the demand for the new product has been projected to
be about 1,000 units annually. To get a handle on the carrying and ordering costs,
Lisa prepared a series of average inventory costs. Lisa thought that these costs
would be appropriate for the new product. The results are summarized in the
following table. These data were compiled for 10,000 inventory items that were
carried or held during the year and were ordered 100 times during the past year.
Help Lisa determine the EOQ.
COST FACTOR COST ($)

Taxes 2,000
Processing and inspection 1,500
New product development 2,500
Bill paying 500
Ordering supplies 50
Inventory insurance 600
Product advertising 800
Spoilage 750
Sending purchasing orders 800
Inventory inquiries 450
Warehouse supplies 280
Research and development 2,750
Purchasing salaries 3,000
Warehouse salaries 2,800
Inventory theft 800
Purchase order supplies 500
Inventory obsolescence 300

6-34 North Manufacturing has a demand for 1,000 pumps each year. The cost of
a pump is $50. It costs North Manufacturing $40 to place an order, and the
carrying cost is 25% of the unit cost. If pumps are ordered in quantities of 200,
North Manufacturing can get a 3% discount on the cost of the pumps. Should
North Manufacturing order 200 pumps at a time and take the 3% discount?

6-35 Linda Lechner is in charge of maintaining hospital supplies at General

Hospital. During the past year, the mean lead time demand for bandage BX-5 was
60. Furthermore, the standard deviation for BX-5 was 7. Linda would like to
maintain a 90% service level. What safety stock level do you recommend for BX-
5?
6-36 Linda Lechner has just been severely chastised for her inventory policy. (See
Problem 6-35.) Sue Surrowski, her boss, believes that the service level should be
either 95% or 98%. Compute the safety stock levels for a 95% and a 98% service
level. Linda knows that the carrying cost of BX-5 is 50 cents per unit per year.
Compute the carrying cost that is associated with a 90%, a 95%, and a 98%
service level.

6-42 For SKU A3510 at the Hardware Warehouse, the order quantity has been
set at 150 units each time an order is placed. The daily demand is normally
distributed, with a mean of 12 units and a standard deviation of 4. It always takes
exactly 5 days for an order of this item to arrive. Holding cost has been
determined to be $10 per unit per year. Due to the large volume of this item sold,
management wants to
maintain a 99% service level.
(a) What is the standard deviation of demand during the lead time?
(b) How much safety stock should be carried, and what should be the reorder
point?
(c) What is the total annual holding cost?

6-39 Dillard Travey receives 5,000 tripods annually from Dillard runs a large
photographic outlet, and the tripods are used primarily with 35-mm cameras. The
ordering cost is $15 per order, and the carrying cost is 50 cents per unit per year.
Quality is starting a new option for its customers. When an order is placed,
Quality will ship one-third of the order every week for three weeks instead of
shipping the entire order at one time. Weekly demand over the lead time is 100
tripods.
(a) What is the order quantity if Dillard has the entire order shipped at one time?
(b) What is the order quantity if Dillard has the order shipped over three weeks
using the newoption from Quality Suppliers, Inc.? To simplify your calculations,
assume that the average inventory is equal to one-half of the maximum inventory
level for Quality’s new option.
(c) Calculate the total cost for each option. What do you recommend?