1.

An automobile manufacturer uses about 60,000 pairs of bumpers (front bumper and rear
bumper) per year, which it orders from a supplier. The bumpers are used at a reasonably steady
rate during the 240 working days per year. It costs $3.00 to keep one pair of bumpers in
inventory for one month, and it costs $25.00 to place an order. A pair of bumpers costs $150.00.

a. Which inventory model should be used here: the instantaneous model, the non-
instantaneous model, or the single-period model? How do you know?
b. Write the annual carrying cost function.
c. Write the annual ordering cost function.
d. Write the annual total cost function.
e. What is the EOQ?
f. What is the significance of the EOQ?
g. What is the total annual expense of ordering the EOQ every time?
h. How many orders will be placed per year?
i. What is the total annual expense of ordering 600 pairs of bumpers every time? How
much is saved per year by ordering the EOQ?

2. The Acme Bumper Co. manufactures bumpers for automobiles for one of the big three auto
companies. About 60,000 pairs of bumpers (front bumper and rear bumper) are ordered by the
auto company per year, at a price of $150.00 per pair. Pairs of bumpers are produced at a rate of
about 400 per working day, and the company operates 240 days per year. The company
manufactures other products, and it must set up the manufacturing system for a production order
for pairs of bumpers, which costs $250.00. It costs $2.50 to store one pair of bumpers for one
month.

a. Which inventory model is appropriate here: the instantaneous model, the

noninstantaneous model, or the single-period model? How do you know?
b. Write the annual carrying cost function.
c. Write the annual setup cost function.
d. Write the annual total cost function.
e. What is the EOQ?
f. What is the significance of the EOQ?
 g. What is the total annual expense of producing the EOQ every time?
h. How many production runs will be required per year?
i. What is the total annual expense of manufacturing 3,000 pairs of bumpers per production
run? How much is saved per year by producing the EOQ every time?

3. Use the data from Problem 1 to solve this problem, in addition to the data below. The supplier
offers a system of quantity discounts, as follows:

Order Quantity Cost per Pair Discount

1 to 299 pairs $150.00 0%
300 to 499 pairs $150.00 4%
500 or more pairs $150.00 10%

a. Which inventory model is appropriate here: the instantaneous model, the quantity
discount model, or the single-period model? How do you know9
b. Write the annual total cost function for orders for less than 300 pairs.
c. Write the annual total cost function for orders for 300 to 499 pairs.
d. Write the total cost function for orders for at least 500 pairs.
e. Draw the graph of the three total cost functions on a piece of rectangular coordinate
paper.
f. What is the EOQ?
g. What is the total annual expense, including the purchasing cost of ordering the EOQ
every time?

4. The purchasing agent has ascertained that the usage of floppy disks in the company is
approximately normally distributed, with a mean of 30 per working day and a variance of 16.
The company operates 240 days per year. Floppy disks are obtained from a supplier who is very
reliable, when an order is placed (on day 0), it is always received on the fifth working day. The
company cannot afford to run out of floppy disks, and the purchasing agent has established a
99.5 percent service level.

a. Which reorder-point model is appropriate here, fixed lead time and variable demand,
variable lead time and fixed demand, or variable demand and variable lead time?
 b. What is the mean usage during lead time?
c. What is the standard deviation of the usage during lead time?
d. What is the reorder point? Draw a diagram like the one in Figure 13-11 in your textbook.
e. What is the significance of the reorder point?
f. What is the safety stock?

5. The purchasing agent has ascertained that the employees use about 50 pencils per day, with
very little variation. Pencils are ordered from a supplier whose shipments are irregular. They are
normally distributed with a mean of 10 working days and a variance of 4. He has established a
95 percent service level for pencils.

a. Which reorder-point model is appropriate here: variable demand and fixed lead tirne,
fixed demand and variable lead time, or variable demand and variable lead time?
b. What is the mean usage during lead time?
c. What is the standard deviation of usage during lead time?
d. What is the reorder point? Draw a diagram in the style of Figure 13-13 in your textbook.
e. What is the significance of the reorder point?
f. What is the safety stock?

6. The purchasing agent has ascertained that the usage of letterhead paper has an approximately
normal distribution with a mean of 200 sheets per working day and a standard deviation of 13
sheets. Letterhead paper is ordered from a printer whose deliveries are variable, with a mean of
25 working days and a variance of 4 working days. The purchasing agent has established a 99
percent service level for letterhead paper.

a. Which reorder-point model is appropriate here: variable demand and fixed lead time,
fixed demand and variable lead time, or variable demand and variable lead time?
b. What is the mean usage during lead time?
c. What is the standard deviation of usage during lead time?
d. What is the reorder point? Draw a diagram in the style of Figure 13-13 in your textbook.
e. What is the significance of the reorder point?
f. What is the safety stock?
7. (One step beyond; based on statistics.) The Whirlwind Appliance Store sells freezers for home
use. These are large, upright units which resemble a refrigerator. They differ in operation in that
the entire interior is kept at a freezing temperature. The store orders the freezers from the factory,
which is very reliable and will deliver the order within one week (7 calendar days) almost
invariably. Here are the volumes of sales for the past 50 weeks: 2, 1, 4, 5, 2, 0, 3, 6, 7, 3, 4, 2, 2,
4, 3, 5, 5, 1, 3, 6, 4, 5, 1, 0, 1, 4, 3, 5, 7, 6, 3, 5, 4, 1, 5, 5, 4, 5, 6, 4, 3, 2, 5, 4, 1, 5, 2, 5, 4. Future
sales are expected to be similar. The store manager wishes to establish a 95 percent service level.

a. What is the frequency distribution for this data? Does it appear to be approximately
normal?
b. What are the mean sales of freezers per week?
c. What is the empirical probability distribution?
d. What is the cumulative probability distribution?
e. What is the reorder point? (Hint: use the cumulative probability distribution.)
f. What is the safety stock?

8. An appliance store knows that the distribution of monthly sales of 50" TV sets is
approximately normal with a mean of 6 sets and a standard deviation of 1.5 sets. The sets cost
$2,750 each, and are priced at $4,000. The sets are ordered from the manufacturer on the 10th of
the month (or the preceding business day), and there is a lead time of seven business days. There
are 20 business days in a typical month. The manager wishes to maintain a 90 percent service
level. The store is open six days a week and Sunday afternoons. On March 31, the store had five
50" TV sets on hand. Here is data regarding sales for the next three months:

Month Sales
April 4 sets
May 8 sets
June 7 sets

a. Which inventory model is appropriate here: the fixed quantity and variable order interval
model, the variable quantity and fixed order interval model, or the single period model?
b. How many sets should be ordered on April 10?
 c. What will be the ending inventory on April 30?
d. How many sets should be ordered on May 10?
e. What will be the ending inventory on May 31?
f. How many sets should be ordered on June 10?

Solution:

1. a. Use the instantaneous model.

b. The annual carrying cost = HQ/2 = 3(12)Q/2 = 18Q.
c. The annual ordering cost = DS/Q = 60000(25)/Q = 1500000/Q.
d. The annual total cost = 18Q + 1500000/Q.

e. Image97 Image98 » 289 pairs of bumpers.

f. Every time the company places an order, it should order 289 pairs of bumpers.
g. The annual total expense = (Q/2)H + (D/Q)S = (289/2)36 + (60,000/289)25 = $10,392.00 per
year.
h. The number of orders = D/Q = 60000/289 » 208 per year.
i. The annual total expense = 18(600) + 1500000/600 = $13,300. The annual savings are $13,300
- $10,392 = $2,908.00.

2. a. Use the non-instantaneous model.

b. The annual carrying cost = (HQ/2)[(P-U)/P] = (2.50(12)Q/2)[(400 - 60000/240)]/400 =
5.625Q.
c. The annual setup cost = DS/Q = 60000(250)/Q = 15000000/Q.
d. The annual total cost = 5.625Q + 15000000/Q.

e. EOQ = Image99 Image100 = Image101 x =

Image102 1,633 pairs of bumpers.
f. The company should place a production order for 1,633 pairs of bumpers every time.
g. The annual total cost = 5.625EOQ + 15000000/EOQ = 5.625(1633) + 15000000/1633 »
$18,371.00 per year.
h. The number of production runs = D/EOQ = 60000/1633 = 36.74 runs per year.
i. The annual total cost = 5.625(3000) + 15000000/3000 = $21,875.00. The annual savings are
$21,875.00 - $18,371.00 = $3,504.00.

3. a. Use the quantity discount model.

b. The annual total cost = 18Q + 1500000/Q + 150D.
c. The net price = 150(1 - d) = 150(1 - .04) = $144.00. The annual total cost = 18Q + 1500000/Q
+ 144D.
d. The net price = 150(1 - d) = 150(1 - .10) = $135.00. The annual total cost = 18Q + 1500000/Q
+ 135D.
e.
f. The EOQ is the minimum feasible point, which is 500 pairs of bumpers.
g. The annual total cost = 18(500) + 1500000/500 + 135(500) = $79,500.00

4. a. Use the fixed lead time and variable demand model.

b. The mean usage during lead time = Image103 (LT) = 30(5) = 150 floppy disks.

c. The standard deviation = Image104 floppy disks.

d. ROP = Image103 (LT) + z(standard deviations) = 150 + 2.58(8.94) = 173.08 floppy disks
e. When the quantity of floppy disks on hand falls to 173.08 disks (or fewer) place an order for
the economic order quantity.
f. The safety stock = ROP - mean usage = 173.08 - 150 = 23.08 floppy disks.

5. a. Use the fixed demand and variable lead time model.

b. The mean usage during lead time = d Image105 = 50(10) = 500 pencils.

c. The standard deviation = Image106 pencils.

d. ROP = Image103 (LT) + z(standard deviations) = 500 + 1.65(100) = 665 pencils.

e. When the quantity of pencils on hand falls to 665 (or fewer), place an order for the economic
order quantity
f. The safety stock = ROP - the mean usage = 665 - 500 = 165 pencils.

6. a. Use the variable demand and variable lead time model.

b. The mean usage during lead time = Image103 (LT) = 200(25) = 5,000 sheets.
c. The standard deviation = Image107 =

Image108 = Image109 = 405.25 Sheets.

d. ROP = The mean usage + z(standard deviations) = 5000 + 2.33(405.25) = 5,944.23 sheets.
e. When the quantity of letterhead paper on hand falls to 5,944.23 sheets (or fewer) place an
order for the Economic Order Quantity.
f. The safety stock = ROP - the mean usage = 5,944.23 - 5,000 = 944.23 sheets.

7. a,b,c

Freezer ¦ ¦x P Cumulative

Sales (x) p

0 2 0 .04 .04

1 6 6 .12 .16

2 6 12 .12 .28

3 8 24 .16 .44

4 10 40 .20 .64

5 12 60 .24 .88

6 4 24 .08 .96 ¬

7 2 14 .04 1.00

50 180 1.00

The frequency distribution is highly skew negative and is not approximately normal.

d. Image110 freezers per week.

e. The first cumulative probability which exceeds .95 is .96, and the reorder point is 6 freezers.
f. The safety stock = 6 - 3.6 = 2.4 freezers.

8. a. Use the fixed order interval and variable

Image111 quantity model.

b. The expected demand = Image103 (OI + LT) = 6 sets.

The safety stock = sets.
The order quantity = the expected demand + the safety stock - the quantity on hand = 6 + 1.92 - 5
» 3 sets.
c. The ending inventory on April 30 will be 5 + 3 - 4 = 4 sets.
d. The order quantity = the expected demand + the safety stock - the quantity on hand= 6 + 1.92 -
4 » 4 sets.
e. The ending inventory on May 31 will be 4 + 4 - 8 = 0 sets.
f. The order quantity = the expected demand + the safety stock - the quantity on hand= 6 + 1.92 -
0 » 8 sets.