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# Inventory: Problem Solving

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EOQ: Example 1
• The ABC Semi Conductor Company purchase 40,000
units of mother board each year at a cost of \$30.00
per unit. The ordering cost is \$10.00 per order, and
the annual holding cost is estimated at 15% of the
unit value.
– What is the EOQ for the ABC?
– What is the total annual inventory cost for the mother
board if it is ordered in economic quantities?
– How many orders should be placed each year?

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EOQ: Example 2
• A company makes bicycles. It produces 500
bicycles a month. It buys the tires for bicycles
from a supplier at a cost of \$35 per tire
annually. The company’s inventory carrying
cost is estimated to be 20% of purchase cost
and the ordering cost is \$50 per order.
-What is the EOQ?
-What is the total annual cost?
-How many orders should be placed each year?

Slide 3
EOQ 3
The ABC Company purchases a component used in the
manufacturing of automobile generators directly from the supplier.
ABC's generator production operation, which is operated at a
constant rate, will require 1,000 components per month throughout
the year. The ordering costs are \$25.00 per order, unit cost is
\$2.50 per component, and annual inventory holding costs are
charged at 20% of the unit cost.

## Tavanti DLP December 2006

EPQ: Example 1
• A fan manufacture plans to produce 40,000 units of a
special type of fan next year. The production rate is
200 fans per day, and there are 250 working days
available in a year. The setup cost is \$200.00 per run;
the unit production cost is \$15.00; holding cost is
\$11.50 per unit per year.
-What is the economic production quantity?
-What is the total variable inventory cost for the fan
on an annual basis?
-How many production runs should be made each
year?

Slide 5
EPQ: Example 2
• Wonderful Wood Stuff operates 300 days per year and makes
a variety of small wood products. The demand for one
popular item, a set of napkin rings, is 12,000 per year. Setup
cost for this item is \$50. Inventory holding cost is \$0.50. The
daily production rate is 200.
(a) Find the economic production quantity.
(b) Find the annual cost of setups and holding inventory
for the economic production quantity
© How many production runs you performed for a year?

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