SYBBA SEM III UNIT II 2022

INVENTORY MODELING

1. XYZ company buys in lots of 500 boxes which is a 3 month supply. The cost per box is Rs.125 and the
ordering cost is Rs.150. The inventory cost is estimated at 20% of unit value.
(i) What is the total annual cost of the existing inventory policy?
(ii) How much money could be saved by employing the economic order quantity?
2. ABC Plumbing Supply Company stocks thousands of plumbing items sold to regional plumbers,
contractors and retailers. Mr. X, the firm’s general manager, wonders how much money could be saved
annually if EOQ were used instead of the firm’s present rules of thumb. He instructs Mr. Y to conduct
an analysis of one material only to examine if significant savings might result from using the EOQ. Mr. Y
develops the following estimates from accounting information: D=10,000, Q = 400 values per order
(present order quantity),
Ch = Rs.4 per unit per year, C0 = Rs. 55 per order
3. For one of the A – class items, the following data are available: Annual demand = 1,000; Ordering cost =
Rs.400
Holding cost = 40% and cost per unit = Rs.20. The following three strategies are available for the
procurement:
(i) Place four orders of equal size every year.
(ii) Place the order for 500 units at a time and avail a discount of 10% on the cost of items.
(iii) Follow EOQ policy.
Which of the above strategy do you recommend? Justify your answer.
4. A manufacturer has to supply his customers 600 units of his product per year. Shortages are not
allowed and the inventory carrying cost amount to Re.0.60 per unit year. The set-up cost per run is
Rs.80. Find:
(i) The Economic Order Quantity.
(ii) The minimal average yearly cost.
(iii) The optimal number of orders per year.
(iv) The optimal period of supply per optimal order
(v) The increase in the total cost associated with ordering (a) 20 percent more and (b) 40per cent less
than EOQ.
Ans: 400, 240,4
5. The annual demand for an item is 3200 units. The unit cost is Rs.6 and inventory carrying charges 25%
per annum. If the cost of one procurement is Rs. 150, determine:
(i) Economic order quantity
(ii) No. of orders per year
(iii) Time between two consecutive orders, and
(iv) Optimal cost.
6. A company, for one of the A-class items, placed 6 orders each of size 200 in a year. Given ordering cost
= Rs.600, holding cost = 40%, cost per unit = Rs.40, find out the loss to the company in not operating
scientific inventory policy? What are your recommendations for the future?
7. XYZ Plumbing Company uses 10,000 units of a particular valve per year. Each value costs Rs. 32. The
production engineering department estimates set-up cost as Rs.55 and the accounting department
estimates the holding cost as 12.5% of the valve of inventory. Replenishment rate is uniform 120 valves
per day. Assuming 250 working days, calculate (i) optimal order quantity (ii) total inventory cost on the
basis of optimal policy, and
(iii) optimal order of set-ups.
8. The demand for an item is deterministic and constant over the time and it is equal to 600 units per year. The
per unit cost of the item is Rs. 50 while the cost of placing an order is Rs. 5. The inventory carrying cost is
20% of the cost of inventory per annum and the cost of shortage is Re. 1 per unit per month. Find the
optimal ordering quantity when shortages are permitted. If the shortages are not permitted, what would
be loss to the company?
Ans: 33 units, Rs181 : shortages not allowed then 24.5 units and Rs. 245

9. The cost of parameters and other factors for a production inventory system of automobile pistons are given
below:
Demand per year = 6,000 units : Unit cost = Rs. 40
Set-up cost = Rs. 500 : Holding cost per year = Rs. 8 : Shortage cost per unit per
year = Rs. 20
Find (i) optimal lot size (ii) number of shortages (iii) time between set-up.
Ans: 1025units, 293 units, 0.17 year.

10. The annual requirements for a particular raw material are 2000 unit costing Re. 1 each to the manufacturer.
The ordering cost is Rs. 10 per order and the carrying cost 16% per annum of the average inventory value.
Find the economic order quantity and the total inventory cost per annum.
Ans; 500, Rs. 6400

11. A company purchases 10,000 items per year for its use in its production shop. The unit cost is Rs. 10, holding
cost is 20% per annum of the average inventory and cost making a purchase is Rs. 100. Determine the
following, if no shortages are allowed.
(i) The optimal order quantity.
(ii) The optimal total year cost
(iii) The number of order per year.
(iv) The time between the orders.
Ans; 1000, Rs. 2828.4, 10, 36.5 days

12. A manufacturer has to supply his customers 600 units per year. Shortages are not allowed and the
inventory carrying cost amount to Re. 0.60 per unit year. The set-up cost per run is Rs. 80. Find
(i) The economic Order Quantity.
(ii) The minimal average yearly cost,
(iii) The optimal numbers of orders per year,
(iv) The optimal period of supply per optimal order.
(v) The increase in the total cost associated with ordering 20 percent more than EOQ.
Ans: 400, 240, 3/2, 8 months, increase by Rs.4

13. The annual demand for an item of inventory is 10,000 units, ordering costs amount to Rs.60 per order,
and inventory holding costs amount to 30% per year. The price per unit of the item is Rs. 10. Quantity
1
7
discount of 5% is allowed on an order of more than 600 units, which is raised to 2 % if the quantity
ordered is more than 2000 units. Suggest the most economic ordering quantity.
14. A producer has to supply 12,000 units of a product per year to his customer. The demand is fixed and
known and backlogs are not allowed. The inventory holding cost is Rs.0.20 per unit per month and the
set up cost per run is Rs. 350/- per run. Determine (a) the optimal lot size, (b) Optimum scheduling
period, (c) Minimum total expected yearly cost.
15. ABC manufacturing company purchase 9,000 parts of a machine for its annual requirement, ordering
one month’s usage at a time. Each part costs Rs. 20/-. The ordering cost per order is Rs. 15/ - and the
inventory carrying charges are 15% of the average inventory per year. You have been asked to suggest
a more economical purchasing policy for the company. What advice would you offer and how much
would it save the company per year.
Ans: Saving =1305-900=405
16. A particular item has a demand of 9,000 units per year. The cost of one procurement is Rs. 100/- and
the holding cost per unit is Rs. 2.40 per year. The shortages are allowed are the shortage cost Rs. 5/-
per unit per year. (a) Find Economic lot size, (b) Number of orders per year, (c) The time between two
orders, and (d) Total cost per year including material cost, taking unit price as Re.1/- per unit.

17. The demand for an item is deterministic and constant over time and it is equal to 600 units per year.
The per unit cost of the item is Rs. 50/- while the cost of placing an order is Rs. 5/-. The inventory
carrying cost is 20% of the cost of inventory per year and the cost of shortage is Re.1/- per unit per
month. Find the optimal order quantity when stock outs are permitted. If stock outs are not permitted
what would be the loss to the company.
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