Inventory Management

EOQ Model 1 14.1 Given: D = 5,000 units per year, C = $1 per unit per year, S = $100 per order. a. Compute the EOQ b. Compute the TSC at EOQ

14.2

If D = 300,000 units per year, C = 30 percent of acquisition cost per unit per year, S = $5.95 per order, and ac = $1.50 per unit. a. What is the EOQ? b. What is the TSC at the EOQ? c. How much would TSC increase if the order quantity must be 3,000 units because of a standard shipping container size?

14.3 If D 5 500,000 units per year, C 5 40 percent of acquisition cost per unit per year, S 5 $59.50 per order, and ac 5 $5.50 per unit: a. What is the EOQ? b. What is the TSC at the EOQ? c. How much would the TSC increase if the order quantity must be 6,000 units because of a standard shipping-container size? 14.4 The Greenmore Lawn Products Company produces lawn fertilizer. One raw materialammonium nitrateis purchased in large quantities in the making of fertilizer. 2,500,000 tons of ammonium nitrate are forecast to be required next year to support production. If ammonium nitrate costs $122.50 per ton, carrying cost is 35 percent of acquisition cost, and ordering cost is $1,595 per order: a. In what quantities should Greenmore buy ammonium nitrate? b. What annual stocking costs will be incurred if ammonium nitrate is ordered at the EOQ? c. How many orders per year must Greenmore place for ammonium nitrate? d. How much time will elapse between orders?

14.5

The Lendmore Bank orders cash from its home office to meet daily countertransactions. If Lendmore estimates that $25,000,000 will be needed next year, each order for cash costs $2,650 (which includes clerical and armored-car delivery costs), and idle cash costs 8 percent: a. What quantities of cash should Lendmore include on each order? b. What total annual stocking costs would result from Lendmores following your recommendation in Part a? c. How many days could Lendmore operate with each order of cash if it stayed open 260 days a year and cash were ordered at the EOQ?

14.7

Several managers of the Hospital Service Company, a hospital maintenancecontracting firm that services electronic hospital equipment, are reviewing some rather disturbing news at their monthly financial review meeting. The vicepresident of finance states that the cost of financing the companys supplies inventories has increased 30 percent and the acquisition cost of its electronic components has increased 15 percent. Increased labor rates and fringe benefits have caused ordering costs to rise 20 percent, and annual demand for electronic components has declined 10 percent. Charlie McDonald, vice-president of operations, sits quietly at the end of the conference table waiting for the inevitable question. Finally it comes from the companys president: Charlie, how much, percentage-wise, will your order quantities change and how much will your total annual stocking costs change for electronic components? Can you answer for Charlie?

EOQ Model 2 14.8 Given: p = 2d, C = 1/3(ac) dollars per unit per year, D = 100,000 units per year, ac = $5.95 per unit, and S = $100 per order. a. Compute the EOQ b. Compute the TSC at EOQ

14.9

The production rate of final assembly is 500 electrical switches per day. After the switches are assembled, they go directly to finished-goods inventory. Customer demand averages 100 switches per day and about 10,000 switches per year. If it costs $20 to set up the assembly line for the switches and $.50 per switch per year to carry the switches in inventory: a. How many switches should be in a production lot at final assembly? b. What is the TSC at the EOQ?

14.10 The Oklahoma Crude Oil Refinery buys crude oil from the Red Rock oil field located in eastern New Mexico, western Texas, and western Oklahoma. The refinery has been guaranteed through long-term supply contracts that its needs for crude will be supplied from this field at $18.90 per barrel as long as the refinery accepts 5,000 barrels per day during shipping periods. The refinery uses crude oil at a rate of 1,500 barrels per day and plans to purchase 450,000 barrels from the Red Rock field next year. If the carrying cost is 20 percent of acquisition cost per unit per year and the ordering cost is $2,500 per order: a. What is the EOQ for Red Rock crude? b. What is the TSC at the EOQ? c. How many days of production are supported by each order of Red Rock crude? d. How much storage capacity is needed for the crude? 14.11 The Continental Box Company produces fiberboard boxes for the Rocky Mountain states region. Continental buys reconstituted kraft paper stock that is made of scrap paper from the FRAB Company, which is next door to its plant. FRAB produces its reclaimed paper for three such fiberboard box companies at a rate of 15,900 pounds per day and sells it to Continental for $.40 per pound. Continental uses 30,000 pounds of kraft paper per day; works 250 days per year; and 10 percent of its kraft is bought from FRAB. If carrying cost is 30 percent of acquisition cost per pound per year and ordering cost is $50 per order: a. What is the EOQ for FRAB's reclaimed kraft? b. What is the TSC at EOQ? c. How many orders per year will Continental place with FRAB?

14.12 The production rate of final assembly is 800 compact discs per day. After the compact discs are assembled, they go directly to finished-goods inventory. Customer demand averages 400 compact discs per day and about 50,000 compact discs per year. If it costs $500 to set up the assembly line for the compact discs and $1.00 per compact disc per year to carry them in inventory: a. How many compact discs should be in a production lot at final assembly? b. What is the TSC at the EOQ? 14.13 An oil refinery buys crude oil on a long-term supply contract for $22.50 per barrel. When shipments of crude oil are made to the refinery, they arrive at the rate of 10,000 barrels per day. The refinery uses the oil at a rate of 5,000 barrels per day and plans to purchase 500,000 barrels of crude oil next year. If the carrying cost is 25 percent of acquisition cost per unit per year and the ordering cost is $7,500 per order: a. What is the EOQ for the crude oil? b. What is the TSC at the EOQ? c. How many days of production are supported by each order of crude oil?

d. How much storage capacity is needed for the crude oil? Quantity Discounts 14.14 Given: D = 20,000 units per year, C = .3(ac) dollars per unit per year, S = $100 per order, ac1 = $2 per unit for 0 to 2,999 units, and ac2 = $1.90 per unit for 3,000+ units. a. What key quantities should be investigated? b. What is the EOQ? c. What is the minimum TMC? 14.15 Swimco Inc., a swimming pool retail supply firm in Phoenix, stocks pelletized chlorine that is sold to local pool owners. Chlorine is ordered from a regional wholesaler in Los Angeles at a uniform price of $95.60 per 100 pounds. Thirty tons of chlorine are estimated to be needed next year. Swimco orders chlorine in the 1 - 5,000 pounds per order range. Carrying costs are 30 percent of acquisition cost per pound per year, and ordering cost is $55 per order. If chlorine is ordered in quantities greater than 5,000 pounds, then carrying costs fall to 20 percent of acquisition cost per pound per year because the supplier gives special late-payment privileges that reduce the interest charges that must ordinarily be paid to finance the chlorine inventory at a local bank, but ordering costs increase to $75 per order because of extra handling costs. How many pounds of chlorine should Swimco order at each order point? 14.16 A building supply wholesaler sells windows. One popular window, part number 14.17 If D = 150,000 units per year, S = $500 per order, C = 0.35 (ac) dollars per unit per year, p = 600 units per day, d = 300 units per day, ac1 = $15 per unit for 1 to 9,999 units per order, ac2 = $14.60 per unit for 10,000 to 19,999 units per order, and ac3 = $14.40 per unit for 20,000+ units per order: a. What is the minimum TMC? b. What is the EOQ? c. How many orders per year must be placed? d. What is the maximum inventory level? 14.18 If D = 50,000 units per year, S = $250 per order, C = .25 (ac) dollars per unit per year, p = 500 units per day, d = 200 units per day, ac1 = $5 per unit for 1 to 5,999 units per order, ac2 = $4.95 per unit for 6,000 to 9,999 units per order, and ac3 = $4.93 per unit for 10,000+units per order. a. What is the minimum TMC? b. What is the EOQ? c. How many orders per year must be placed? d. Compute the maximum inventory level.