International University, HCMC School of IEM – LSCM Program

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INVENTORY MANAGEMENT
HOMEWORK 1
Problem 1: A manufacturing company based in Calgary manufactures a product
with a three-month supply cycle. An analyst is working to introduce a more
rational method for determining production quantities and has acquired the
following estimates regarding the item's attributes:

a) The economic order quantity of the item is:

EOQ=
√2× A×D
v×r
=
√2× 5 ×4,000
0.04 × 0.25
=2,000items
The time between consecutive replenishments of the items when the EOQ is used is:
12× EOQ 12 ×2,000
T= = =6 months
D 4,000
b) The EOQ at A = $5 is 2,000. TRC (2,000) = A×4,000/2,000 + 0.04×0.25×2,000/2 = 2A +
10
Under a three-month supply rule: Q = 4,000/4 = 1,000
TRC (1000) = A×4,000/1,000 + 0.04×0.25×1000/2 = 4A + 5
2A + 10 ≤ 4A + 5 where 2A ≥ 5 or A ≥ $2.5

Problem 2: The famous Ernie of Sesame Street continually faces replenishment

decisions concerning his cookie supply. The Cookie Monster devours the
cookies at an average rate of 200 per day. The cookies cost $0.03 each. Ernie is
getting fed up with having to go to the store once a week. His friend Bert has
offered to do a study to help Ernie with his problem.
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a. If Ernie is implicitly following an EOQ policy, what can Bert say about
the implicit values of the two missing parameters?
The two missing parameters are cookie fixed cost (A) and interest rate (r).
If Ernie is implicitly following an EOQ policy, then:
2 2 × D × A 2× 200 × A
Q= =
v ×r 0.03× r
This implies that:
2 2
A Q ×0.03 1,400 ×0.03
= = =147
r 2 ×200 2× 200
We can say about the implicit values that the ratio of ordering cost and
interest rate is 147.
b. Suppose that the store offered a special of 10,000 cookies for $200.
Should Ernie take advantage of the offer? Discuss. (Hint: Consult your
local TV listing for the timing of and channel selection for Sesame Street)
The total cost from a special order for 10,000 at the discount price is:
10,000× v ×r
TC ( 10,000 )=A +10,000 ( 0.02 ) + =147 r + 200+100 r=247 r + 200
2

The total cost from order daily 200 per day:

D Q× v ×r
TC ( 200 )= A +10,000 ( 0.03 ) +
Q 2

¿ 50 A +300+3 r =7,353 r +300

The cost savings from a special order for 10,000 at the discount price is:
F ( r )=TC ( 200 ) −TC ( 10,000 )=7,106 r +100

From the saving cost function above, we can see that the higher the
interest rate are, the more Ernie can save. For example, if the interest rate
is 10% per year (0.027% per day), Ernie will save:

F(0.0027%)=7,106(0.0027%)+100 = $101.95

So, from a financial viewpoint, the special offer is worth taking. However,
a purchase of 10,000 cookies represents a 50-day supply of cookies. The
shelf life if the cookies could be a problem here, i.e., perhaps 50-day-old
cookies would be too stale for the Cookie Monster.
Problem 3: A mining company routinely replaces a specific part on a certain
type of equipment. The usage rate is forty per week, and there is no significant
 International University, HCMC School of IEM – LSCM Program
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seasonality. The supplier of the part offers the following all-units discount
structure.
Range Q Unit cost
0 < Q < 300 units $10.00
Q >= 300 $9.7
The fixed cost of a replenishment is estimated to be $25, and a carrying charge
of 0.26 $/$/yr. is used by the company.
a. What replenishment size should be used?
D = 40 units/week = 2080 units/year
Range Modifi
v D A r Ch EOQ TC
Q ed Q
0<Q
$21,32
< 300 $10 2,080 $25 0.26 $2.6 200 200
0
units
Q >= 203.06 $20,72
$9.7 2,080 $25 0.26 $2.522 300
300 92 8
So, the size that should be used is 300 units.

b. If the supplier was interested in having the mining company acquire at

least 500 units at a time, what is the largest unit price they could charge
for an order of 500 units?
As the supplier wants the mining company to take the order of 500 units,
they should set the unit price to make the new total cost of mining
company will be at least equal to the total cost of order 300 units $20,728.
Therefore, we will have:
Q D
D × v+ × v ×r + A × ≤20,728
2 Q
500 2080
2,080 × v + × v × 0.26+25 × ≤ 20,728
2 500
2080
20,728−25 ×
500
v≤ =9.654
2,080+250 × 0.26

Problem 4: A supplier offers the following discount structure on purchases of

any single item:
0 < Q < 1000 $5.00 per unit
1000 <= Q < 2000 $4.90 per unit
2000 <= Q $4.75 per unit
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The discounts apply to all units. For each of the following items treated
separately, what is the appropriate order quantity to use, assuming a common
value of r = 0.3 $/$/yr.?
Item D (units/yr.) A ($)
1 10,000 25
2 1,000 25
3 4,000 25
4 130,000 25

Item 1
Q v D A r Ch EOQ Modified Q TC
$
0 < Q < 1000 10,000 $ 25.00 0.3 $ 1.50 577.35 578.00 $ 50,866.03
5.00
1000 <= Q < $
10,000 $ 25.00 0.3 $ 1.47 583.21 1,000.00 $ 49,985.00
2000 4.90
$
2000 <= Q 10,000 $ 25.00 0.3 $ 1.43 592.35 2,000.00 $ 49,050.00
4.75
Item 2
$
0 < Q < 1000 1,000 $ 25.00 0.3 $ 1.50 182.57 183.00 $ 5,273.86
5.00
1000 <= Q < $
1,000 $ 25.00 0.3 $ 1.47 184.43 1,000.00 $ 5,660.00
2000 4.90
$
2000 <= Q 1,000 $ 25.00 0.3 $ 1.43 187.32 2,000.00 $ 6,187.50
4.75
Item 3
$
0 < Q < 1000 4,000 $ 25.00 0.3 $ 1.50 365.15 366.00 $ 20,547.72
5.00
1000 <= Q < $
4,000 $ 25.00 0.3 $ 1.47 368.86 1,000.00 $ 20,435.00
2000 4.90
$
2000 <= Q 4,000 $ 25.00 0.3 $ 1.43 374.63 2,000.00 $ 20,475.00
4.75
Item 4
$
0 < Q < 1000 130,000 $ 25.00 0.3 $ 1.50 2,081.67 - -
5.00
1000 <= Q < $
130,000 $ 25.00 0.3 $ 1.47 2,102.80 - -
2000 4.90
$
2000 <= Q 130,000 $ 25.00 0.3 $ 1.43 2,135.74 2,136.00 $ 620,543.44
4.75

Conclusion:
Item 1: Order 2,000 items for the lowest total cost.
Item 2: Order 183 items for the lowest total cost.
International University, HCMC School of IEM – LSCM Program
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Item 3: Order 1,000 items for the lowest total cost.

Item 4: Order 2,136 items for the lowest total cost.