INVENTORY MODELS

Problems
1. Alpha industry estimates that it will sell 12,000 units of its product for the
forthcoming year. The ordering cost is Rs. 100 per order and the carry cost / unit /
year is 20% of the purchase price. The purchase price / unit is Rs. 50/-. Find
a)
b)
c)
d)

EOQ (490 units)

No. of order/year (24)
Time bet-orders (0.04 yrs)
Optimal total cost (Rs. 6, 04,899).

2. A company for one of the A class items placed 6 orders each of size 200 in a year.
Given ordering cost Rs. 400, Holding cost 40%, cost/unit Rs.40/-. Find out the
loss to the company in not operating scientific inventory policy. What are your
recommendations for the future.
Ans: 80/3. For the data given below find EOQ & Total variable cost.
Annual Demand = 5000 units, Unit price = 20/-, Ordering cost/order =
Rs.16/- Storage rate2% p.a, Interest rate 12% p.a, Obsolescence rate 6%
p.a.
Ans: (200,800).
b) Det. Total variable cost that would result for the item if an incorrect price
of Rs. 12.80 is used.
Ans: (250, 820)
a)

4. The purchase manager has decided to place an order for a minimum qty of 500
nos. of a particular item in order to get a discount of 10%. From the records, it was
found out that in the last year, 8 orders each of size 200 nos. were placed.
Given:

Ordering cost
Inventory carrying cost
Cost/unit

=
=
=

Rs. 500/order
40%
Rs.400/-

Is the purchase manager justified in his decision? What is the effect of his decision
on the company?
Ans: Yes, Saving over EOQ policy of ordering Rs. 42, 400, saving over present
policy of ordering Rs. 46, 400/5. A company uses annually 50,000 units of an item. Each costing Rs.1.20. Each
order costs Rs.45/- and Inventory carrying cost is 15% of the average Inventory
value.

Find:
a) EOQ
Ans.5000.
b) If the company operates 250 days a year, the procurement time being 10
days and safety stock is 500 units. Find Reorder Level, Max Level, Min
Level and Avg. inventory.
Ans: 2500, 5500, 3000 units.
6. The average monthly consumption of an item is 200 units and the normal lead
time is 1 month. If the max consumption has been upto 250 units per month and
the max. Lead time is 1 months. What would be the buffer stock for the item if
the item is controlled by Fixed order quantity system (FOQ) system.
Ans: 175 units.
7. A firm has a demand distribution during a constant lead time with a std. deviation
of 250 units. The firm wants to provide 98% service level.
a)
b)

How much safety stock should be carried?

If the demand during lead time is 1200 units. What is the appropriate
Reorder level (Z value for 98% is 2.05)?
Ans: 512, 1712 units.

8. An airline has determined that 10 spare brake cylinders will give them a stock out
risk of 30%, whereas 14 will reduce the risk to 15% and 16 to 10%. It takes 4
months to receive the cylinder from the supplier and the airline uses on average of
4 cylinders/ months. At what stock level should they reorder assuming they wish
to maintain an 85% service level?
Ans: 30 cylinders.
9. The average demand for an item is 120 units / year. The lead time is one months
and the demand during lead time follows normal distribution with average of 10
units and S.D. of 2 units. If the item is ordered once in 4 months and the policy of
the company is that there should not be more than 1 stock out every 2 years. Det.
Reorder level?
10. A scrutiny of past records gives the following distribution for lead time and daily
demand during lead time.
Lead time distribution:

Demand distribution:

LT (days)

4 5 6

10

Freq

3 4 4

Demand/day

2 3 4

Freq

5 5 4

What should be the safety stock?

Ans: 52/-.
11. Data on the distribution of lead time for a pump component were collected as
shown below. The management would like to set safety stock that would limit the
stock out risk to 10%.
Lead Time
01
12
23
34
45
56
67
78

Frequency
10
20
70
40
30
10
10
10

How many weeks of safety stock are required to protect the desired service level.
Ans: 2.6 weeks.

12. Find the optimal order qty for a product for which the price break is as follows.
Qty
0 <= Q1 < 50
50 <= Q2 < 100
100 <= Q3

Unit Price
Rs. 10
Rs. 9
Rs. 8

The monthly demand for the product is 200 units. The storage cost is 25% of the
unit cost and the ordering cost is Rs. 20/- order.

13. Find the optimum order qty for a product for which the price breaks are as follows
Qty
0 <= Q1 < 100
100 <= Q2 < 200
200 <= Q3

Unit Price
Rs. 20 per unit
Rs. 18 per unit
Rs. 20 per unit

The monthly demand for the product is 400 units. The storage cost is 20% of the
unit cost of the product and the cost of ordering is Rs. 25 per order.
Ans: EOQ

Q3*
Q2*
Q1*

=
=
=

79
75
70

TC
TC
TC

=
=
=

6770
7480
8283

14. A company purchase one of its items for Rs. 2 per unit without qty discount. The
ordering cost is Rs. 20/- per order and the carrying cost is 20% of its purchase
price per unit per year. The annual demand is 2500 units. A new vendor offers
quantity discount for the same item on per the following quantity discount
scheme. Find the best order quantity.

Qty
0 <= Q1 < 1500
1500 <= Q2 < 200
2500 <= Q3

Unit Price
C
97% of C
95% of C

15. An automobile factory manufactures a particular type of gear within the factory.
This gear is used in the final assembly. The particulars of this gear are
D
P
S
H

=
=
=
=

Demand rate
Production rate
Setup cost
Carrying cost

14,000 units / year

35,000 units / year
Rs. 500 / setup
Rs. 15 / unit / year

Find Economic Batch quantity & Cycle time?

Ans: 1248, t1 13 days, t2 20 days, t = 33 days.
16. A Company manufactures a low cost bearing which is used in main product line.
The demand of the bearing is 10,000 units / months and the production rate of the
bearing is 25,000 units per months. The carrying cost is Re. 0.02 per unit per year
and the setup cost is Rs. 18 per set up. Find EBQ & cycle time.
17. Find the most economic batch qty of a product on a machine if the product rate
of that item on the machine is 200 pieces / day and the demand is uniform at the
rate of 100 pieces / day. The setup cost is Rs. 200 per batch and the cost of holding
one item in inventory is Rs. 0.81 per day.
b) How will the batch quantity vary if the rate production rate is infinite?
18. The annual demand for a component is 7200 units. The carrying cost is Rs. 500 /
unit / year. The ordering cost is Rs. 1500/- order and the shortage cost is Rs.
2000 / unit / year. Find EOQ, max inventory max shortage qty, inventory period &
shortage period.
19. The demand of an item in a store is 18,000 units per year. The purchase price of
the item is Rs. 5/- per unit and its carrying cost is Rs. 1.2 per unit per year and the
ordering cost is Rs. 400/- per order. The shortage cost is Rs. 5/- per unit per year.
Find EOQ, no of orders / year, the max inv, max, shortage qty and the total cost.
1