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1
L. Houts Plastics is a large manufacturer of injection-molded plastics in North Carolina. An
investigation of the companys manufacturing facility in Charlotte yields the information
presented in the table below. How would the plant classify these items according to an ABC
classification system?
L. Houts Plastics Charlotte Inventory Levels
Item Code
#
Average Inventory (units)
Value ($/unit)
1289
400
3.75
2347
300
4
2349
120
2.5
2363
75
1.5
2394
60
1.75
2395
30
2
6782
20
1.15
7844
12
2.05
8210
8
1.8
8310
7
2
9111
6
3
Ans:
Item
Cod
e#
128
9
234
7
234
9
236
3
239
4
239
5
784
4
678
2
911
3.75
1500
44.49%
300
1200
Class
35.59% A
120
2.5
300
8.90%
75
1.5
112.5
3.34%
60
1.75
105
3.11%
30
60
12
2.05
24.6
20
6
1.15
3
23
18
Class
1.78% B
Class
0.73% C
0.68%
0.53%
Total
Percentage
of Annual
Dollar
Volume ($)
80.08%
17.13%
2.79%
1
821
0
831
0
1.8
14.4
0.43%
14
0.42%
3371.5
100.00%
Total Dollar
Volume ($)
100.00%
19500
25
4
Results
Optimal Order Quantity,
Q*
Maximum Inventory
Average Inventory
Number of Orders
493.71
493.71
246.86
39.50
Holding cost
Setup cost
987.42
987.42
Unit costs
Total cost, Tc
$0.00
$1,974.84
15000
75
25
50
2
300
Maximum Inventory
Average Inventory
Number of Setups
Holding cost
Setup cost
300
150
50
$3,750.00
$3,750.00
Unit costs
Total cost, Tc
Reorder Point
$0.00
$7,500.00
100
annual demand of 250 units, and this is constant throughout the year. Carrying cost is
estimated to be $1 per unit per year, and the ordering cost is $20 per order.
a) To minimize cost, how many units should be ordered each time an order is placed?
b) How many orders per year are needed with the optimal policy?
c) What is the average inventory if costs are minimized?
d) Suppose that the ordering cost is not $20, and Cotteleer has been ordering 150 units each
time an order is placed. For this order policy (of Q = 150) to be optimal, determine what the
ordering cost would have to be.
Ans:
Data
Demand rate, D
Setup/order cost, S
Holding cost, H
Unit Price, P
Results
Optimal Order Quantity,
Q*
Maximum Inventory
Average Inventory
Number of Orders
Holding cost
Setup cost
Unit costs
Total cost, Tc
250
20
1
100
100
50
2.50
50
50
$0.00
$100.00
a) To minimize cost, how many units should be ordered each time an order is placed?
Ans:
EOQ = SQRT (( 2* Demand * Order Cost)/ Holding Cost)
EOQ = SQRT ((2* 250 * 20) /1) = 100 Units
b) How many orders per year are needed with the optimal policy?
Ans:
Number of Orders = Annual Demand / Q = 250 /100 = 2.50
Ans:
Average Inventory = 100/2 = 50
d) Suppose that the ordering cost is not $20, and Cotteleer has been ordering 150 units each
time an order is placed. For this order policy (of Q = 150) to be optimal, determine what
the ordering cost would have to be.
Ans:
EOQ = sqrt (( 2* Demand * Order Cost)/ Holding Cost)