INVENTORY MODELS

HOMEWORK # 1

Problem # 1

A product is consumed at the rate of 30 units per day. The holding cost per unit per day is $0.05, and the
setup cost is $100. Suppose that no shortage is allowed, and the unit purchasing cost is $10 for any quantity
less than or equal to 500 units and $8 otherwise.

(a) Find the economic lot size.

(b) Find the optimal cycle time.

Problem # 2

Each year the JAV Optometry Clinic sells approximately 10,000 frames for eyeglasses. The clinic orders the
frames from a regional supplier. The regional supplier charges $15 per frame. The fixed cost of preparing
the order and handling the frames is $50. The manager of JAV Optometry believes that the demand for
frames can be backlogged and that the annual shortage cost per frame is $15 (due to a possible loss of future
business). The annual inventory holding cost is $5 per frame.

(a) What is the optimal order quantity?

(b) What is the maximum inventory level that will occur?

(c) What is the maximum shortage that will occur?

Problem # 3:

Suppose that the demand for a product is 30 units per month and the items are withdrawn at a constant rate.
The setup cost each time a production run is undertaken to replenish inventory is $15. The production cost is
$1 per unit, and the inventory holding cost is $0.30 per unit per month.

(a) Assuming shortages are not allowed, determine how often to make a production run and what size it
should be.

(b) If shortages are allowed, but the shortage cost is $3 per unit per month, determine how often to make a
production run and what size it should be.

Problem # 4

A taxi company uses gasoline at a constant rate of 8,500 gallons per month. The company purchases and
stores a huge amount of gasoline at a discount every few months. The gasoline costs $1.20 per gallon for
the first 20,000 gallons purchased, $1.10 per gallon for the next 20,000 gallons, and $1.00 per gallon
thereafter. The setup cost is $1,000 for each order. The inventory holding cost is $0.01 per gallon per
month. Assuming that shortages are not allowed, determine how often and how much to order.

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Problem # 5:

In the basic EOQ model, suppose the stock is replenished uniformly (rather than instantly) at the rate of b
items per unit time until the order quantity Q is fulfilled. Withdrawals from the inventory are made at the
rate of a items per unit time, where a < b. Replenishments and withdrawals of inventory are made
simultaneously. For example, if Q is 60, b is 3 per day, and a is 2 per day, then 3 units of stock arrive each
day for days 1 to 20, c31 to 50, and so on., whereas units are withdrawn at the rate of 2 per day every day.
The diagram of inventory level versus time is given below for this example.

(20, 20)
A

Q
r-a = 1 -a = 2
x(t)

M (30, 0) t
T

(a) Find the total cost per unit time in terms of the setup cost K, production quantity Q, unit cost
c, holding cost h, withdrawal rate a, and replenishment rate a.

(b) Determine the economic order quantity Q*.

Problem # 6

Suppose that production planning is to be done for the next 5 months, where the respective demands are r1
= 2 units, r2 = 4 units, r3 = 2 units, r4 = 2 units, and r5 = 3 units. The setup cost is $4,000, the unit
production cost is $1,000, and the unit holding cost is $300 per month. Use the deterministic periodic
review model to determine the optimal production schedule that satisfies the monthly requirements.