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COMM 225: POM
TOPIC
4
:
INVENTORY
MANAGEMENT
–
QUESTION
S
(
Tutorial
with Answers
)
Q1 (Ref: Q.
13

12, p583
)
: The
purchasing manager for
the Pacific Steel company must determine a policy for
ordering
coal to operate 12 converters. Each converter
requires exactly 5
tons of coal per day to operate
, and
the
firm operates 360 days per year
.
T
he purchasing
manger has deter
mined that the
ordering cost is $80
per order
, and the cost of holding coal is 20% of the
average value of inventory held. T
he purchasing
manager has negotiated a contract to obtain the coal
for $12 per ton for the coming year.
a.
Determine the optimal
quantity of coal to
receive in each order.
b.
Determine the total inventory

related costs
associated with the optimal ordering policy
(don’t include the cost of the coal).
c.
If
five days lead time is required to receive an
order of coal, how much coal should be
in hand
when an order is placed?
Answers:
Optimal quantity of coal =1200 tons
; Total
inventory

related costs = $2880
;
Re

order point = 300
tons.
Q2
(Ref: Q.
13

23, p585
)
: T
he
bookstore at Tech
purchases jackets emblazoned with the school name
and logo from a vendor. The vendor sells
the
jackets to
the store for $38 apiece. The cost to the bookstore for
placing an order is $120, and the annual carrying cost is
25% of the cost o
f jacket. The bookstore manager
estimates that 1700 jackets will be sold during the year.
The vendor has offered the bookstore the following
volume discount schedule:
Order Size
Discount
1

299
300

499
500

799
800+
0%
2%
4%
5%
What is the bookstore
optimal order quantity, give
n
this quantity discount information?
Answers:
Optimal quantity of coal =
500
tons; Total
inventory

related costs =
$ 64,704
Q3
(Ref: Q.
13

32, p585
)
:
Kelly’s Tavern serves
Shamrock draft beer to its customer. The daily demand
for beer is normal
ly
distributed, with an average of 20
gallons and
standard
deviation of 4 gallons. The lead
time required to receive an order of beer from the local
distributor is 12 days. Determined the safety stock and
reorder point if the restaurant w
ant
s
to maintain
a
90% service level.
What would be the increase in the
safety stock if a 95% service level is desired?
Answers:
At 90% service level, safety stock
=
17.87
gal
,
Reorder point = 257.87 gal;
at
95% service level,
s
afety
stock
=
22.86
gal
;
there is an increase of 5 gallons.
Q4
(Ref: Q.
13

38, p586):
The Mediterranean
Restaurant stocks a red Chilean table wine it purchases
from a wine merchant in nearby city. The daily demand
for the wine at the res
taurant is normally distributed
,
with a mean of 18 bottles and
standard
deviation of 4
bottles. The wine
merchant sends a
representative to
check the restaurant’s wine cellar every 30 days, and
during a recent visit there were 25 bottles in stock. The
lead time to receive an order is 2
days. The restaurant
manger has requested an order size that will enable
him to
limit the probability of
a stock out to 5%.
What
is the order size?
Answers:
Order Size
=
588.3 bottles
Q5
(Ref: Q.
13

40, p586):
The East Coasters Bicycle
shop stocks bikes; h
elmets ; clothing; a variety of bike
parts including chains, gears , tires, wheels; and biking
accessories. The shop is in a storefront location on a
busy street and it has very limited storage space for
inventory. It often runs out of items and is unable
to
serve customer
s
. To help manage its inventory
,
the
shop would like to classify the stock using the ABC
system. Following is a list of items the shop stocks and
the annual demand and unit value for each:
Item
Number
Annual
demand
Unit
cost
Item
Number
Annual
demand
Unit
cost
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
10
18
36
9
4
3
19
56
105
27
19
12
7
10
6
18
$8
16
30
1230
760
810
420
35
17
350
36
115
2300
245
665
28
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
110
74
8
10
7
5
5
46
32
101
83
54
14
9
7
16
$23
18
610
935
270
1400
900
67
160
45
12
16
42
705
37
26
Classify the inventory items according to the ABC
approach using dollar value of annual demand
.
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2
Answers:
Class
Items
Quantity
$ Value
%
Value
%
Quantity
A
4, 5, 6,
13,
20,
52
59,835
51
5.5
22, 23,
30
B
7, 10,
14,
77
30,640
26
8.2
15, 19,
21
C
1, 2, 3,
8, 9,
11,
811
27,493
23
86.3
12, 16,
17, 18,
24, 25,
26, 27,
28, 29,
31, 32
940
$117,968
100%
100%
Solutions
 Ratings 95
 Grade: A
 Questions 0
 Solutions 3821
 Blog 1
 Earned: $8541.05