Name- Aashita Jain

Roll No. – S193F0001

Inventory Management Assignment
Q1. A manufacturer has to supply his customer with 360 units of his product per year. Shortages are not
allowed and the storage cost amount to Rs 1 per unit per year. The set-up cost per run is Rs. 100.
(a) Find the optimum run size and the minimum average yearly cost.
(b) Assuming a 300-day work year; how many runs should be processed per year? What is the expected
time between set-up?
Ans.
a) EOQ  √ 2AB/C
Where, A = unit per year B = Set up cost C = Carrying cost
= √ 2*360*100/1 = 268 units (approx.)
No. of orders placed = 360 ÷ 268 = 1.34 or say 1 order
Set up cost for 1 order @ Rs 100 Rs. 100
Average inventory cost per year (268 x 1) ÷ 2 Rs. 134
Minimum average yearly cost Rs. 234
a) Since working day per year = 300
Expected time between set up = No. of working days per year / No. of orders placed
= 300 / 1.34
= 223.8 = 224 days

Q2. If demand for an item is 3 units per day, and delivery lead-time is 15 days, what should we use for a re-
order point?
Ans. Reorder Point = Average Daily Unit Sales * Delivery Lead Time
= 3*15 = 45

Q3. Assume that our firm produces type C fire extinguishers. We make 30,000 of these fire extinguishers
per year. Each extinguisher requires one handle (assume a 300 day work year for daily usage rate purposes).
Assume an annual carrying cost of $1.50 per handle; production setup cost of $150, and a daily production
rate of 300. What is the optimal production order quantity?
Ans.
The formula for optimal production quantity of any order can be written as--
Q p = √ ((2 x Demand x Order cost)/ (Holding cost x (1- (Daily usage rate)/ (Daily production rate))))
Q p = √ ((2 x 30000 x 150)/ (1.5*(1- (100)/300)))
Q p = 3000 units (approx)
Q4. A contractor has to supply 1000 bearing per day to an automobile manufacturer. He finds that when he
starts a production run, he can produce 25000 bearing per day. The cost of holding a bearing in stock for one
year is 2 paisa and the set-up cost of a production run is Rs. 18. How frequently should production run be
made?
Ans.
Given:
H = Rs. 0.02 / bearing / year = Rs.0.02/365 / bearing / day
S = Rs.18 / production run
D= 1,000 bearings/day
p = 25,000 bearings / day.
Production order quantity (Q*) = √ ((2 x Demand x Order cost)/ (Holding cost x (1- (Daily
usage rate)/ (Daily production rate))))
= √ (2*1,000*18*100*365) / 2(1-1,000 / 25,000)
= √ 684,375,000
= 26160.56
= 26,161 bearings
Time between production runs = Q* / Demand
= 26,161 / 1,000
=26.16 days
Length of production cycle = Q* / daily production rate
= 26,161 / 25,000
= 1.046 days
Thus, the production cycle starts at an interval of 26.16 days and production continues for 1.046 days.

Q5. Demand for the Child Cycle at Best Buy is 500 units per month. Best Buy incurs a fixed order
placement, transportation, and receiving cost of Rs. 4,000 each time an order is placed. Each cycle costs Rs.
500 and the retailer has a holding cost of 20 percent. Evaluate the number of computers that the store
manager should order in each replenishment lot?
Ans. EOQ= √ (2*RU*OC)/ (UC*CC %)
Where- RU- 500 units p.m. = 12*500= 6000 units/year
OC- Rs 4000
UC- Rs 500
CC- 20%
= √ (2*6000*4000)/ (500*20%)
= 693 Units

Q6. ABC Ltd. uses EOQ logic to determine the order quantity for its various components and is planning its
orders. The Annual consumption is 80,000 units, Cost to place one order is Rs. 1,200, Cost per unit is Rs. 50
and carrying cost is 6% of Unit cost. Find EOQ, No. of order per year, Ordering Cost and Carrying Cost and
Total Cost of Inventory.
Ans.
1) EOQ
EOQ= √ (2*RU*OC)/ (UC*CC %)
Where- RU- 80000 units
OC- Rs 1200
UC- Rs 50
CC- 6%
= √ (2*80000*1200)/ (50*6%)
= 8000 units
2) No. of order per year
No. of orders per year= Annual Requirements / EOQ
= 80000/8000 =10 orders per year.
3) Ordering Cost
Ordering Cost = Fixed Ordering Cost * Number of orders per year
= 1200*10
= Rs. 12000
4) Carrying Cost
Carrying Cost = (Carrying Cost * EOQ)/2
= (50*0.06*8000)/2 = Rs 12000
5) Total cost of inventory
Total Inventory Cost= Ordering Cost+ Carrying Cost
= 12000+12000 =Rs. 24000

Q7. Midwest Precision Control Corporation is trying to decide between two alternate Order Plans for its
inventory of a certain item. Irrespective of the plan to be followed, demand for the item is expected to be
1,000 units annually. Under Plan 1st, Midwest would use a teletype for ordering; order costs would be Rs.
40 per order. Inventory holding costs (carrying cost) would be Rs. 100 per unit per annum. Under Plan
2nd order costs would be Rs. 30 per order. And holding costs would 20% and unit Cost is Rs. 480. Find out
EOQ and Total Inventory Cost to decide which Plan would result in the lowest total inventory cost?
Ans.
Plan 1-
EOQ= √ (2*RU*OC)/ (UC*CC %)
Where- RU- 1000 units
OC- Rs 40
 UC- Rs 100
= √ (2*1000*40)/ (100)
= 28 units

Ordering Cost = Fixed Ordering Cost * Number of orders per year

= 40* 1000/28
= Rs. 1440

Carrying Cost = (Carrying Cost * EOQ)/2

= 100*28/2 = Rs 1400

Total Inventory Cost = 1440 + 1400 = Rs 2840

Plan 2-

EOQ= √ (2*RU*OC)/ (UC*CC %)

Where- RU- 1000 units
OC- Rs 30
UC- Rs 480
CC- 20%
= √ (2*1000*30)/ (480*0.20)
= 25 units
Ordering Cost = Fixed Ordering Cost * Number of orders per year
= 30* 1000/25= Rs. 1200

Carrying Cost = (Carrying Cost * EOQ)/2

= 480*0.20*25/2 = Rs 1200

Total Inventory Cost = 1200+ 1200 = Rs 2400

Hence, plan 2 results in the lowest total inventory cost.

Q8. A company makes bicycles. It produces 450 bicycles a month. It buys the tires for bicycles from a
supplier at a cost of $20 per tire. The company’s inventory carrying cost is estimated to be 15% of cost and
the ordering is $50 per order. Calculate EOQ.
Ans.
Given-
D = Annual Demand = (2 tires per bicycle) x (450 bicycles per month) x (12 months in a year) = 10,800 tires
S = ordering cost = $50 per order
H = carrying cost = (15%) x ($20 per unit) = $ 3.00 per unit per year
EOQ = √ (2 x 10,800 x $50) / $3 = √ 400,000 = 600 tires
The company should order about 600 tires each time it places an order.

Q9. We need 1,000 electric drills per year. The ordering cost for these is $100 per order and the carrying
cost is assumed to be 40% of the per unit cost. In orders of less than 120, drills cost $78; for orders of 120 or
more, the cost drops to $50 per unit.
Should we take advantage of the quantity discount?

Ans.
EOQ ($78) = √ (2 x 1000 x $100) / (0.4*78) =80 units
EOQ ($50) = √ (2 x 1000 x $100) / (0.4*50) = 100 units
Ordering 100 units at $50 per unit is not possible; the discount does not apply until the order equals 120
units.
Therefore, we need to compare the total costs for the two alternatives.

Total cost= Demand*Cost + (Demand*Order Cost)/Q + [(Quantity of Items)*(Holding cost)]/2

Total Cost ($78) = 1000*78 + (1000*100)/80+ (80*0.4*78)/2

= 78,000 + 1,250 + 1,248
= $80,498

Total Cost ($50) = 1000*50 + (1000*100)/120+ (120*0.4*50)/2

= 50,000 + 833.33 + 1,200
= $52,033.33

Therefore, we should order 120 units each time at a unit cost of $50 and a total cost of $52,033.