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COMM 225: POM
TOPIC
4
:
INVENTORY
MANAGEMENT
(
Practice
Questions
with Answers
)
Q1 (Ref: Q. 1
3

3, p58
2

58
3
)
:
A firm is faced with the
attractive situation in which it can obtain immediate
delivery of an item it stocks for retail sale. The firm has
therefore not bothered to order the item
in any systematic
way.
However, recently profits have
been
squeezed due to
increasing competitive
pressures,
and the
firm has reta
ined
a management consultant to
study its
inventory
management. The consultant has determined that
the
various costs associated with making an order for the
item
stocked are approximately $70 per
order. She has also
determined that the costs of carrying the item in inventory
amount
to approximately $27 per unit per year (primarily
direct storage costs and forgone profit on investment in
inventory). Demand for the item is reasonably constant
over
ti
me, and the forecast is for 16,500 units per year.
When an
order is placed for the item, the entire order is
immediately
delivered to the firm by the supplier. The firm
operates 6
days a week plus a few
Sundays
or approximately
320 days
per year. Determine
the following:
(a)
Optimal order
quantity per order
, (b
)
Total
annual inventory costs
, (c)
Optimal number of orders to place per year
, (d)
Number of
operating days between orders, based on the
optimal
ordering
.
Ans
wers
:
(a) Optimal order quantity per
order = 292.5, (b)
Total annual inventory costs
= $7897.47
, (c) Optimal number
of orders to place per year
= 56.41
, (d) Number of operating
days between orders, based on the optimal ordering
= 5.67
days
Q2
(Ref: Q. 1
3

11, p583
)
:
The Shotz
Brewery produces an
ale, which it stores in barrels
in its warehouse and supplies
to its distribut
ors on demand.
The demand for ale is 1800
barrels per day. The brewery can produce 3000 barrels per
day. It costs $7500
to set up a production run for ale. O
nce it
is brewed, the ale
is stored in a refrigerated warehouse at
an annual cost of
$60 per barrel. Determine th
e
economic
order quantity and
the minimum total annual inventory cost.
Answers:
E
conomic order quantity
=
20,263.88
and the
minimum total annu
al inventory cost
= $486,333.22
Q3
(Ref: Q. 1
3

15, p584
)
:
The Deer Valley Farm produces a
natural organic fertilizer,
which it sells mostly to gardeners
and homeowners.
The annual demand for fertilizer is
220,000 pounds. The
farm is able to produce
305,000
pounds annually. The
cost to transport the fertilizer from
the plant to the farm
is $620 per load. The annual carrying
cost is $0.12 per
pound.
(a)
Compute the optimal order size,
the maximum inventory
level, and the total minimum cost.
(b)
If the
farm can increase production capacity to 360,000
pounds per year, will it reduce total inventory cost?
Answers:
(a) optimal order size
= 90,317.52
, the maximum
inventory level
= 25,179.46, and the total minimum cost
=$ 3020.45
(b) If the farm can increase production capacity to 360,000
pounds per year,
optimal order size
= 76,457.27
,
and the total
minimum cost =$ 30568.01.
It increase the inventory cost.
Q4
(Ref: Q. 1
3

25
, p53
9
of textbook)
:
The offi
ce
manager for
the Metro
Life Insurance Company
orders letterhead
stationery from an office products firm in
boxes of 500
sheets. The company uses 6500 boxes per
year. Annual
carrying costs are $3 per box, a
nd
ordering
costs are $28.
The
discount price schedule is
provided by the
office supply
in the table below. Determine the optimal order quantity
and the total annual inventory cost.
Order Quantity (boxes)
Price per Box
200

999
1000

2999
3000

5999
6000+
$16
14
13
12
Answers:
Optimal order quantity = 6,000 and the total
annual inventory cost = $87,030.33
Q5
(Ref: Q. 1
3

29, p585
)
:
The amoun
t of
denim used daily
by the Southwest Apparel
Company in its manufacturing
process to make jeans is
normally distributed with an
average
of 4000 yards of
denim and a standard deviation of
600 yards. The lead time
required to receive an order of
denim from the textil
e
mill
is a constant 7 days. Determine
the safety stoc
k
and reorder
point if the company wants to
limit th
e
probability of
a st
ock
out and work stoppage to 5%.
Answers:
S
afety stock = 2603.42 yards
and R
eorder point =
30,603.42 yards.
Q6
(Ref: Q. 1
3

30, p585
)
:
In Problem 13

29, what level of
service would a safety stock of 2000 yards provide?
Answers:
Service Level = 90%.
Q7
(Ref: Q. 1
3

37, p586
)
:
Food Place Market stocks frozen
pizzas in a refrigerate
d
display case. The average daily
demand for the pizzas is
normally
distributed, with a mean
of 8 pizzas and a standard deviation of 2.5 pizzas. A vendor
for a packaged food dis
tributor checks the market's
inventory of frozen
foods
every 10 days; during a particular
visit there were no pizzas in stock. The lead time to receive
an order is three days. Determine the order size for this
order period that will result in a 98% service
level. During
the vendor's following visit there were 5 frozen pizzas in
stock. What is the order size for the next order period?
Answers:
O
rder size for the next order period
= 122 pizzas.
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2
Q7
(Ref: Q. 1
3

39, p586
)
:
Th
e Aztec
Company stocks a
variety
of parts and materials it uses in its manufacturing
processes. Recently, as demand for its finished goods has
increased, management has had difficulty managing parts
inventory; they frequently run out of some crucial parts and
seem to have an endless supp
ly of others. In an effort to
control inventory more effectively, they would like to
classify their inventory of parts according to the ABC
approach. Following is a list of selected parts and the annual
usage and unit 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
36
510
50
300
18
500
710
80
344
67
510
682
95
10
820
$350
30
23
45
1900
8
4
26
28
440
2
35
50
3
1
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
60
120
270
45
19
910
12
30
24
870
244
750
45
46
165
$610
20
15
50
3200
3
4750
2710
1800
105
30
15
110
160
25
Classify the
inventory items according to the ABC approach
using dollar value of annual demand.
Answers:
%
%
Unit
Annual
Annual
Annual
Item
Usage
Cost
Usage
Value
Usage
Class
25
870
105
$91,350
15.97%
10.43%
A
23
30
2,710
81,300
14.21
0.36
A
20
19
3,200
60,800
10.63
0.23
A
22
12
4,750
57,000
9.97
0.14
A
24
24
1,800
43,200
7.55
0.29
A
16
60
610
36,600
6.40
0.72
A
5
18
1,900
34,200
5.98
0.22
A
10
67
440
29,480
5.15
0.80
B
12
682
35
23,870
4.17
8.18
B
2
510
30
15,300
2.68
6.11
B
4
300
45
13,500
2.36
3.60
B
1
36
350
12,600
2.20
0.43
B
27
750
15
11,250
1.97
8.99
B
9
344
28
9,632
1.68
4.12
B
29
46
160
7,360
1.29
0.55
B
26
244
30
7,320
1.28
2.92
B
28
45
110
4,950
0.87
0.54
B
13
95
50
4,750
0.83
1.14
C
30
165
25
4,125
0.72
1.98
C
18
270
15
4,050
0.71
3.24
C
6
500
8
4,000
0.70
5.99
C
7
710
4
2,840
0.50
8.51
C
21
910
3
2,730
0.48
10.91
C
17
120
20
2,400
0.42
1.44
C
19
45
50
2,250
0.39
0.54
C
8
80
26
2,080
0.36
0.96
C
3
50
23
1,150
0.20
0.60
C
11
510
2
1,020
0.18
6.11
C
15
820
1
820
0.14
9.83
C
14
10
3
30
0.01
0.12
C
8,342
571,957
100.00%
100.00%
Solutions
 Ratings 95
 Grade: A
 Questions 0
 Solutions 3821
 Blog 1
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