EOQ model related:

1. A large law firm uses an average of 40 boxes of copier paper a day. the firm operates 260 days a year. Storage
and handling costs for the paper are $30 a year per box, and it costs approximately $60 to order and receive a shipment
of paper. a) what order size would minimize the sum of annual ordering and carrying costs? b) compute the total annual
cost using your order size from part a. c) Except for rounding, are annual ordering and carrying cost always equal at the
EOQ? d) The office manager is currently using an order size of 200 boxes. The partners of the firm expect the office to
be managed “in a cost-efficient manner”. Would you recommend that the office manager use the optimal order size
instead of 200 boxes? Why?
Solution:
D = 40/day x 260 days/yr. = 10,400 packages
S = $60 H = $30
2DS 2(10,400)60
a. Q0    203.96  204 boxes
H 30
Q D
b. TC  H S
2 Q
204 10,400
 (30)  (60)  3,060  3,058.82  $6,118.82
2 204
c. Yes
200 10,400
d. TC 200  (30)  (60)
2 200
TC200 = 3,000 + 3,120 = $6,120
6,120 – 6,118.82 (only $1.18 higher than with EOQ, so 200 is acceptable.)

2. Item X is a standard item stocked in a company’s inventory of component parts. Each year the firm, on a random
basis, uses about 2000 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital,
amount to $5 per unit of average inventory. Every time an order is placed for more item X, it costs $10. (a) Whenever
item X is ordered, what should the order size be? (b) What is the annual cost for ordering item X? (c) What is the
annual cost for storing item X?
Solution:

2 DS 2(2000)10
Qopt  
a. H 5 = 89.44  89

D 2000
b. Ordering cost = S (10) = $224.72
Q 89

Q 89
c. Holding cost = H  (5) = $222.50
2 2

3. A food processor uses approximately 27,000 glass jars a month for its fruit juice product. Because of storage
limitations, a lot size of 4,000 jars has been used. Monthly holding cost is 18 cents per jar, and reordering cost is $60
per order. The company operates an average of 20 days a month.
a) What penalty is the company incurring by its present order size?
b) The manager would prefer ordering 10 times each month but would have to justify any change in order size. One
possibility is to simplify order processing to reduce the ordering cost. What ordering cost would enable the
manager to justify ordering every other day?
 c) Suppose that after investigating ordering cost, the manager is able to reduce it to $50. How else could the
manager justify using an order size that would be consistent with ordering every other day?
Solution:
Demand D = 27,000 jars/month
Holding cost H = $0.18/month
Ordering cost S = $60
2 DS 227 ,00060
a. Q    4 ,242.64  4 ,243.
H 0.18
Q D
TC= H S
2 Q
 4 ,000   27 ,000 
TC4000 =  0.18    60   765
 2   4 ,000 

 4 ,243   27 ,000 
TC4243 =  0.18     * 60  763.68
 2   4 ,243 
The penalty is that the food processor should to pay 765-763.68=$1.32 incurring by its current order size.
D
b. For to equal 10, Q must be 2,700
Q

2 DS 2 * 27,000 * S
Q So 2,700 
H 0.18
Solving, S = $24.30 The new ordering cost should be reduced to $24.30.

c. The carrying cost happened to increase rather dramatically from $0.18 to approximately
$0.3705.

2 DS 227,000 50
Q  2 ,700 
H H
Solving, H = $0.3705
EPQ model related:
1. The Friendly Sausage Factory (FSF) can produce hot dogs at a rate of 5000 per day. FSF supplies hot dogs to local
restaurants at a steady rate of 250 per day. The cost to prepare the equipment for producing hot dogs is $66. Annual
holding costs are 45 cents per hot dog. The factory operates 300 days a year. Help FSD decide on (1) the optimal run
size, (2) the number of runs per year, and (3) the length (in days) of a run.
Solution:
p = 5,000 hotdogs/day
u = 250 hotdogs/day
300 days per year D= 250/day x 300 days/yr. = 75,000 hotdogs/yr.
S = $66
H = $.45/hotdog per yr.
2DS p 2(75,000)66 5,000
a. Q0    4,812.27 [round to 4,812]
H pu .45 4,750
b. D/Qo = 75,000/4,812 = 15.59, or about 16 runs/yr.
 c. run length: Qo/p = 4,812/5,000 = .96 days, or approximately 1 day

2. A chemical firm produces sodium bisulfate in 100-pound bags. Demand for this product is 20 tons per day. The
capacity for producing the product is 50 tons per day. Setup costs $100, and storage and handling costs are $5 per ton
a year. The firm operates 200 days a year. (Note: 1 ton = 2000 pounds) Help the firm solve the below questions: (1)
how many bags per run are optimal? (2) what would the average inventory be for this lot size? (3) what is the length
(in days) of a production run? (4) About how many runs per year would there be? (5) how much could the firm save
annually if the setup cost could be reduced to $52 per run?
Solution:
p = 50/ton/day u = 20 tons/day 200 days/yr. Demand = 20 tons/day x 200 days/yr. = 4,000 tons/yr
S = $100 H = $5/ton per yr.

2DS p 2(4,000)100 50
a. Q0    516.40 tons [10,328 bags]
H pu 5 50  20

Q 516.4
b. I max (p  u )  (30)  309.84 tons [approx. 6,196.8 bags]
P 50
I 309.48
Average is max :  154.92 tons [approx. 3,098 bags]
2 2
Q 516.4
c. Run length =   10.33 days
P 50

D 4,000
d. Runs per year:   7.75 [approx. 8]
Q 516.4
e. Q = 374
I max D
TC = H S
2 Q
TCorig. = $1,549.00
TCrev. = $ 1117.13
Savings would be $432
3. A company can produce a part, which it uses in an assembly operation, at the rate of 50 an hour. The company
operates eight hours a day. Daily usage of the part is 300 parts. The company uses the part every day. The lot size for
producing the part is 6,000 units.
1. Assuming that production begins when there are no parts on hand, what is the maximum number of parts in
inventory?
2. The machine is dedicated to this product. Every so often, preventive maintenance, which requires six working
days, must be performed on it. Does this interrupt production cycles, or is there enough time between cycles to
perform the maintenance? Explain.
Solutions:
p = 50 p/hr. x 8 hr./day = 400 p/day; u = 300 p/day, Run size = 6,000 parts.
Inventory buildup = p – u = 400 – 300 = 100 p/day
Production takes 15 days: 6,000/400 /day = 15 days.
1. Buildup is 100/day x 15 days = 1,500 p.
2. Usage is 300 p/day for 6 days = 1,800 p, but maximum inventory is only 1,500 p. Yes, it would interrupt production.

Newsboy model related:

1. The local supermarket buys lettuce each day to ensure really fresh products. Each morning any lettuce that is left from
the previous day is sold to a dealer that resells it to farmers who use it to feed their animals. This week the
supermarket can buy fresh lettuce for $4 a box. The lettuce is sold for $10 a box and the dealer that sells old lettuce is
willing to pay $1.5 a box. Past history says that tomorrow’s demand for lettuce averages 250 boxes with a standard
deviation of 34 boxes. How many boxes of lettuce should the supermarket purchase tomorrow?
Solution:
Cs = $10 - $4 = $6
Ce = $4 - $1.50 = $2.50

Cs 6
P   .7059  z=0.541446
Ce  Cs 2.50  6

Should purchase 250 + .541446 (34) = 268.4 or 268 boxes of lettuce.

2. Next week, super Discount airlines has a flight from New York to Los Angeles that will be booked to capacity. The
airline knows from past history that an average of 25 customers (with a standard deviation of 15) cancel their
reservation or do not show for the flight. Revenue from a ticket on the flight is $125. If the flight is overbooked, the
airline has a policy of getting the customer on the next available flight and giving the person a free round-trip ticket on
a future flight. The cost of this free round-trip ticket averages $250 (Note that the determination of this cost value has
already involved the selling price of the ticket). Super Discount considers the cost of flying the plane from New York
to Los Angeles a sunk cost. By how many seats should Super Discount overbook the flight?
Solution:
Cs = $125
Ce = $250
Cs 125
P   .333  z = -0.43164
Ce  Cs 250  125

25 + (-.43164)(15) = 18.5254.  Super Discount should overbook 19 passengers on the flight.

3. Sally’s Silk Screening produces specialty T-shirts that are primarily sold at special events. She is trying to decide how
many to produce for an upcoming event. During the event itself, which lasts one day, Sally can sell T-shirts for $20
apiece. However, when the event ends, any unsold T-shirts are sold for $4 apiece. It costs Sally $8 to make a specialty
T-shirt. Using Sally’s estimate of demand that follows, how many T-shirts should she produce for the upcoming
evening?
Demand Probability
300 .05
400 .1
500 .4
600 .3
700 .1
800 .05
Solution:

Cs = $20 - $8 = $12
Ce = $8 - $4 = $4

Cs 12
P=  = .75
Ce  Cs 4  12
 Demand Probability of Cumulative Probability (P)
demand
300 0.05 0.05
400 0.10 0.15
500 0.40 0.55
600 0.30 0.85
700 0.10 0.95
800 0.05 1.00
Therefore, Sally’s should produce 600 T-shirts.

Quantity discount related:

1. A jewelry firm buys semiprecious stones to make bracelets and rings. The supplier quotes a price of $8 per stone for
quantities of 600 stones or more, $9 per stone for orders of 400 to 599 stones, and $10 per stone for lesser quantities.
The jewelry firm operates 200 days per year. Usage rate is 25 stones per day, and ordering costs are $48.
a. If carrying costs are $2 per year for each stone, find the order quantity that will minimize total annual cost.
b. If annual carrying costs are 30 percent of unit cost, what is the optimal order size?
Solution:
S = $48
D = 25 stones/day x 200 days/yr. = 5,000 stones/yr.

Quantity Unit Price a.

1 – 399 $10 H = $2
400 – 599 9 2DS 2(5,000) 48
600 + 8 Q   489.90
H 2

490 5,000
TC490 = *2 + *48 + 9 (5,000) = $45,980
2 490

600 5,000
TC600 = *2 + *48 + 8 (5,000) = $41,000
2 600
 600 is optimum.

b. H = 0.30P
25,00048
EOQ$8   447 NF
0.308
Not feasible at $8/stone
25,00048
EOQ$9   422
0.309 
 (Feasible)
Compare total costs of the EOQ at $9 and lower curve’s price break:
Q D
TC = (0.30P) + (S) +PD
2 Q

422 5,000
TC422 = [0.30($9)] + ($48) + $9(5,000) = $46,139
2 422

600 5,000
TC600 = [0.30($8)] + ($48) + $8(5,000) = $41,120
2 600
Since an order quantity of 600 would have a lower cost than 422, 600 stones is
the optimum order size.

2. A particular raw material is available to a company at three different prices, depending on the size of the order:
Less than 100 pounds $20 per pound
100 pounds to 1000 pounds $19 per pound
More than 1000 pounds $18 per pound

The cost to place an order is $40. Annual demand is 3000 units. Holding (or carrying) cost is 25% of the material
price. What is the economic order quantity to buy each time?
Solution:

Quantity range Cost (C) EOQ Feasible

Less than 100 pounds $20 per pound 219 pounds No
100 to 999 pounds $19 per pound 225 pounds Yes
1,000 or more pounds $18 per pound 231 pounds No
2 DS
Note: EOQ =
iC

Therefore, calculate total cost at Q=225, C=$19, and at Q=1000, C=$18

D Q 3000 225
TC Q  225 ,C 19  DC  S  iC  3000 (19)  40  (.25)19 = $58,068
Q 2 225 2

D Q 3000 1000
TC Q 1000 ,C 18  DC  S  iC  3000 (18)  40  (.25)18 = $56,370
Q 2 1000 2
The best order size is 1,000 units at a cost of $18 per pound.

3. CU, Incorporated (CUI), produces copper contacts that it uses in switches and relays. CUI needs to determine the
order quantity, Q, to meet the annual demand at the lowest cost. The prices of cooper depend on the quantity ordered.
Here are the price-breaks and other data for the problem.
Price of copper $0.82 per pound up to 2499 pounds
$0.81 per pound for orders between 2500 and 5000 pounds
$0.80 per pound for orders greater than 5000 pounds
Annual demand 50K pounds per year
Holding cost 20% per pound per year of the price of the copper
Ordering cost $30

Which quantity should be ordered?

Solution:

Quantity range Cost (C) EOQ Feasible

Less than 2500 pounds $0.82 per pound 4277 pounds No
2500 to 4999 pounds $0.81 per pound 4303 pounds Yes
 5,000 or more pounds $0.80 per pound 4330 pounds No
2 DS
Note: EOQ =
iC

Therefore, calculate total cost at Q=4303, C=$0.81, and at Q=5000, C=$0.80

D Q
TC Q 4303,C 0.81  DC  S  iC
Q 2
50000 4303
 50000(0.81)  30  (.20)(0.81)
4303 2
 $41197.14

D Q
TC Q 5000,C 0.80  DC  S  iC
Q 2
50000 5000
 50000(0.80)  30  (.20)(0.80)
5000 2
 $40700.00

The best order size is 5,000 units at a cost of $0.80 per pound.

ROP/SS related:

1. A company uses 85 circuit boards a day in a manufacturing process. The person who orders the boards follows this
rule: order when the amount on hand drops to 625 boards. Orders are delivered approximately six days after being
placed. The delivery time is normal with a mean of six days and a standard deviation of 1.1 days. The company
knows the standard deviation of demand during the delivery lead time is 93.5 boards. What is the probability that the
supply of circuit boards will be exhausted before the order is received if boards are reordered when the amount on
hand drops to 625 boards?
Solution:

D = 85 boards/day ROP = d x LT + Z * 93.5

ROP = 625 boards 625 = 85 x 6 + Z * 93.5

LT = 6 days Z = 1.23  10.93%

2. Annual demand for a product is 13000 units; weekly demand is 250 units with a standard deviation of 40 units. The
cost of placing an order is 100$, and the time from ordering to receipt is four weeks. The standard deviation of
demand during the delivery lead time is 80 units. The annual inventory carrying cost is 0.65$ per unit. To provide a
98 percent service probability, what must the reorder point be? Suppose the production manager is told to reduce the
safety stock of this item by 100 units. If this is done, what will the new service probability be?
Solution:

 dLT  80 units

Sl = 0.98  z = 2.05

R  dL  z dLT = 250(4) + (2.05)80 = 1000 + 164 = 1164

If safety stock is reduced by 100 units, then new SS = 64 units.

 ss 64
ss  z dLT , z   = 0.80
 dLT 80

z = .80  SL= 79%

EOQ question:

A manager receives a forecast for next year. Demand is projected to be 600 units for the first half of the year
and 900 units for the second half. The monthly holding cost is $2 per unit, and it costs an estimated $55 to
process an order.
a. Assuming that monthly demand will be level during each of the six-month periods covered by the
forecast (e.g., 100 per month for each of the first six months), determine an order size that will
minimize the sum of ordering and carrying costs for each of the six-month periods.
b. Why is it important to assume that demand will be level during each six-month period?
c. If the vendor is willing to offer a discount of $10 per order for ordering in multiples of 50 units (e.g.,
50, 100, 150), would you advise the manager to take advantage of the offer in either period? If so,
what order size would you recommend?

Solution:

H = $2/month; S = $55

D1 = 100/month (months 1–6); D2 = 150/month (months 7–12)

2DS 2(100)55
a. Q0  D1 : Q 0   74.16
H 2
2(150)55
D 2 : Q0   90.83
2
b. The EOQ model requires this.
c. Discount of $10/order is equivalent to S – 10 = $45 (revised ordering cost)
For the first half year:
TC74 = $148.32 (for one month)
50 100
TC 50  ( 2)  ( 45)  $140 *
2 50
100 100
TC 100  ( 2)  ( 45)  $145
2 100
150 100
TC 150  ( 2)  ( 45)  $180
2 150
For the second half year:
TC91 = $181.66 (for one month)
50 150
TC 50  ( 2)  ( 45)  $185
2 50
100 150
TC100  ( 2)  ( 45)  $167.5 *
2 100
150 150
TC150  ( 2)  ( 45)  $195
2 150
EPQ question:
A company is about to begin production of a new product. The manager of the department that will produce
one of the components for the product wants to know how often the machine used to produce the item will be
available for other work. The machine will produce the item at a rate of 200 units a day. Eighty units will be
used daily in assembling the final product. Assembly will take place five days a week, 50 weeks a year. The
manager estimates that it will take almost a full day to get the machine ready for a production run, at a cost of
$300. Inventory holding costs will be $10 a year.
a. What run quantity should be used to minimize total annual costs?
b. What is the length of a production rune in days?
c. During production, at what rate will inventory build up?
d. If the manager wants to run another job between runs of this item, and needs a minimum of 10 days for
the other work, will there be enough time?
e. Given your answer to part d, the manager wants to explore options that will allow this other job to be
performed using this equipment. Name three options that manager can consider.
f. Suppose the manager decides to increase the run size of the component. How many additional units
would be needed to just accommodate the other job?

Solution:
S = $300; D = 20,000 (250 x 80 = 20,000); H = $10.00
p = 200/day; u = 80/day
2DS p 2( 20,000)300 200
a. Q0    1,095.451/1,2910 = 1,414 units
H pu 10 200  80
Q 1,414
b. Run length =   7.07 days
P 200
c. 200 – 80 = 120 units per day
Q 1,414
d. I max  (p  u )  ( 200  80)  848.0 units
P 200
848 ÷ 80/day = 10.6 days
- 1.0 setup
9.6 days
No, because present demand could not be met.
e. 1) Try to shorten setup time by .40 days.

2) Increase the run quantity of the component to allow a longer time between runs.

3) Reduce the run size of the other job.

f. Let Cycle time = X, Let Run time = Y

Q/80 = X, To accommodate other job, X – Y = 11

Y = Q/200

X – Q/200 = 11

Q/80 = 11 + Q/200

Q/80 – Q/200 = 11

Q = 1466.67
 Increase in Q by 1466.67 – 1414 = 52.67

Newsboy question:
Demand for devil’s food whipped-cream layer cake at a local pastry shop can be approximated using a
Poisson distribution with a mean of six per day. The manager estimates it costs $9 to prepare each cake.
Fresh cakes sell for $12. Day-old cakes sell for $9 each. What is the service level if one-half of the day-old
cakes are sold and the rest thrown out? And what stocking level is appropriate for achieving this service
level?

Solution
Cs = Rev – Cost = $12 – $9 = $3.00/cake
Ce = Cost – Salvage = $9 – ½ ($9.00) = $4.50/cake
Demand is Poisson with mean of 6 [From Poisson Table with  = 6.0]
Cs $3.00 Demand Cum. Prob.
SL = = = .40
Cs + Ce $3.00 + $4.50 0 .003
1 .017
Since .40 falls between the cumulative 2 .062
probability for demand of 4 and 5, the 3 .151
optimum stocking level is 5 cakes. 4 .285 .40
5 .446
6 .606
. .

. .

2. Given the below information:

Expected demand during lead time = 300 units

Standard deviation of lead time demand = 30 units
Determine each of the following, assuming that lead time demand is disturbed normally:
a. The safety stock needed to attain a 1 percent risk of stockout during lead time.
b. The ROP that will provide a risk of stockout of 1 percent during lead time.
c. Would a stockout risk of 2 percent require more or less safety stock than 1 1 percent risk? Explain.
Would the corresponding ROP be larger, smaller, or unaffected?
Solution:

expected demand during LT = 300 units

dLT = 30 units
a. Z = 2.33, S.S = Zd LT = 2.33 (30) = 69.9
b. ROP = exp. demand + S.S = 300 + 69.9 = 369.9
c. larger stockout risk  smaller service level  smaller Z  less safety stock
and smaller ROP.
ROP, FOI, and EOQ exercise:
A manager must set up inventory ordering systems for two new items, P34 and P35. P34 can be ordered at any
time, but P35 can be ordered only once every four weeks. The company operates 50 weeks a year, and the
weekly usage rates for both items are normally distributed. The manager has gathered the following information
about the items.

Item P34 Item P35

Average weekly demand 60 units 70 units
Unit cost 15 $ 20 $
Standard deviation of demand 4 units per week 5 units per week
Annual holding cost per unit 30% 30%
Ordering cost 70 $ 30$
Delivery lead time 2 weeks 2 weeks
Acceptable stockout risk 2.5% 2.5%

a. When should the manager reorder each item?

b. What is the order quantity for P34?
c. What is the order quantity for P35 if 110 units are on hand at the time the order is placed?

Solution:

50 wk./yr.

P34 P35

D = 3,000 units D = 3,500 units

d = 60 units/wk. d = 70 units/wk.
d = 4 units/wk. d = 5 units/wk.

LT = 2 wk. LT = 2 wk.

Unit cost = 15 Unit cost = 20

H = (.30)(15) = $4.50 H = (.30)(20) = 6.00

S = $70 S = $30

Risk = 2.5%  z = 1.96 Risk = 2.5%

a. ROPP34 = d x LT+ z LT d = 60*2+1.96* 2 (4) = 131.1

ROPP35 = d x LT+ z LT d = 70*2+1.96* 2 (5) = 153.85

2(3, 000)70
b. QP 34   305.5  306 units
4.50

c. Q = (OI + LT) d + z LT d – A
= 70 (4 + 2) + 1.96 4  2 (5) – 110 = 334