Inventory Control

1. A company requires 16000 units of raw material costing Rs. 2 per unit. The cost
of placing an order is Rs. 45 and the carrying costs are 10 % per year per unit of
the average inventory. Determine i) the economic order quantity ii) cycle time iii)
total variable cost of managing the inventory.
Solution: i) 2684 units
ii) 2 months iii) Rs. 538.4
2. A company needs 600 units per month, the procurement cost is Rs. 36 per order,
the cost of holding it in stock is Rs. 1.20 per unit per year, determine the quantity
that should be procured at a time to optimize the cost involved. If the
consumption of the above item increases to 40 numbers per day and its actual
inventory costs is Rs. 0.50 per unit per month, what will be the revised EOQ?
Solution: i) 658 units ii) 380 units
3. A manufacturer purchases items in lots of 800 units which is a four months
requirement. The cost per unit is Rs. 100 and the ordering cost is Rs. 120 per
batch order. The inventory carrying cost is estimated as 20% of the average
inventory investment.
i) Determine the annual variable cost managing the inventory.
ii) How much saving can be obtained from the EOQ purchases?
Solution: i) Rs. 8360 ii) Rs. 4965.88
4. The rate of consumption of a particular item is 20 units per year. The cost of
procurement (i. e. placing an order and receiving the goods) per order is Rs. 40/- .
The unit cost is Rs. 100/-. The inventory carrying cost is 0.16 % and it depends
upon the average stock. Determine i) EOQ ii) if lead time is 3 months, determine
reorder point.
Solution: i) 10 items ii) 5 units
5. A motor company requires 50000 units of a speedometer per year. The ordering,
receiving and handling cost is Rs. 3 per order, while inspection cost is Rs. 12 per
order. Further details of purchase are as follows:
Interest cost Rs. 0.06 per unit per year; Deterioration and obsolescence
cost Rs. 0.004 per unit per year; Storage cost Rs. 1000 per year for 50,000 units.
Calculate the following:
i) EOQ
ii) Reorder period
iii) Number of orders per year
iv) Total variable cost of inventory
Solution: i) 4226 units
ii) 12 iii) 1 month iv) Rs. 357.50
6. A manufacturer requires rivets at an approximately constant rate of 2500 Kgs per
year. The cost of rivets is Rs. 40 per Kg. The companys purchase manager

estimates that the carrying cost of inventory is 10 % per year. Procurement cost is
Rs. 200 per order.
a) How frequently should orders for rivets be placed and what quantities should
be ordered? Also calculate total cost of inventory.
If the ordering cost is Rs. 470 per order and 15% is the carrying cost, how would
the optimal policy change? How much is the loss per year because of imperfect
cost information?
Solution: a) 5 orders per year; EOQ = 500 Kg; Rs. 2000 b) EOQ = 626 Kg ; 4
orders per year; Rs. 3758 ; Loss = Rs. 1758
7. The purchase manager of a distillery company is considering three sources of
supply for oak barrels. The first supplier offers any quantity of barrels at Rs. 150
each. The second supplier offers barrels in lots of 150 or more at Rs. 125 per
barrel. The third supplier offers barrels in lots of 250 or more at Rs. 100 each. The
distillery uses 1500 barrels a year at a constant rate. Carrying costs are 40 % and
it costs the purchasing agent Rs. 400 to place an order. Calculate the total annual
cost for the order placed to the probable supplier and find out the supplier to
whom orders should be placed.
Solution: Third supplier; Total inventory cost = Rs. 157400
8. An enterprise consumes 48000 units of material costing Rs. 1.20 per unit.
Procurement cost for each order is Rs. 45 and the carrying cost rate is 15% per
year of inventory cost.
i) Find EOQ
ii) Supposing that the enterprise operates 300 days a year and follows EOQ
purchasing policy and that the procurement time is 12 days. If the safety
stock is 500 units, find the re order point, the maximum, minimum and
average level of inventory.
Solution: a) EOQ = 4899 units b) Reorder level = 2420 units; Average inventory
= 2950 units; Minimum stock level = 500 units; Maximum inventory level = 5399
units
9. The following information of an enterprise is available:
Annual consumption: 24000 units; Procurement cost: Rs. 120 per order; Inventory
carrying rate: 20%; Unit price: Rs. 20; Lead time: 10 days
The working days in a year are 240. Determine the EOQ and number of orders per
year. In the past two years the usage rate was recorded as high as 140 units per
day for a recording system based on inventory level. What safety stock is required
to protect against this higher usage rate? What should be the re - order point at
this safety stock level?
Solution: EOQ= 1200 units; Number of orders per year = 20 orders; Safety stock
= 400 units; Reorder point = 1400 units; Maximum stock level = 1600 units

10. ABC company requires 12,000 units of material annually. If ordering costs are Rs.
250 per order, expected lead time is 5 days, unit cost is Rs. 25 per unit and annual
inventory holding costs are charged at 20% and the company operates 250 days a
year, compute EOQ and re order level.
Solution: EOQ
= 1096 units/order; ROL= 240 units
11. Nepal Soft Drink Co. has a soft drink product which has a constant annual
demand rate of 3000 cases and cost Rs. 200 /case. If ordering cost are Rs. 20 and
inventory holding cost are charged at 25%, what is the EOQ for this product?
Also determine the cycle time in days.
Solution: EOQ = 49 cases; Cycle time = 6 days
12. The production department of a company requires 3600 Kg of raw materials for
manufacturing a particular item per year. It has been estimated that the cost of
placing an order is Rs. 36 and the cost of carrying the inventory is 25% of the
investment in the inventories. The price is Rs. 10 per Kg. The purchase manager
wishes to determine an ordering policy for the raw materials. Recommend the
manager in the following aspects: a) The optimal lot size b) The optimal reorder
time.
Solution: a) 322 Kg b) 27 days
13. A company uses annually 50,000 units of an item costing Rs. 1.20. It operates
250 days in a year and procurement time is 10 days. Each order costs Rs. 45 and
inventory carrying cost is 15% of the annual average inventory value. If the safety
stock is 500 units find EOQ, ROL, minimum, maximum and average inventory
levels.
Solution: EOQ= 5, 000 units; ROL = 2,500 units; Minimum Inventory Level =
500 units; Maximum Inventory Level= 5500 units; Average Inventory Level =
3,000 units

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