Inventory Management Practice Problems Chapter 12

Page 1
Ch 12 – Inventory Mgt
Practice Problems
Problem #12-1:
The Welsh Corporation uses 10 key components in one of its manufacturing plants. Perform an ABC
analysis from the data shown below. Explain your decisions and logic.
SKU
Item Cost $
Annual
Demand
WC219
0.10
12,000
WC008
1.20
22,500
WC916
3.20
700
WC887
0.41
6,200
WC397
5.00
17,300
WC654
2.10
350
WC007
0.90
225
WC419
0.45
8,500
WC971
7.50
2,950
WC713
10.50
1,000
Problem #12-2:
The following table contains figures on the monthly volume and unit costs for a random sample of 16
items from a list of 2,000 inventory items at a health care facility. Develop an A-B-C classification
for these items.
Item
Unit Cost
Usage
K34
10.00
200
K35
25.00
600
K36
36.00
150
M10
16.00
25
M20
20.00
80
Z45
80.00
200
F14
20.00
300
F95
30.00
800
F99
20.00
60
D45
10.00
550
D48
12.00
90
D52
15.00
110
D57
40.00
120
N08
30.00
40
P05
16.00
500
P09
10.00
30
Problem #12-3:
A large bakery buys flour in 25-pound bags for $30 per bag. The bakery uses an average of 4,860 bags
a year. Preparing an order and receiving a shipment of flour involves a cost of $10 per order. Annual
holding costs are $75 per bag.
a. Determine the Economic Order Quantity?
b. What is the average number of bags on hand?
c. How many orders per year will there be?
d. Compute the total costs of ordering and holding flour.

Page 2
Ch 12 – Inventory Mgt
Practice Problems
Problem #12-4:
Garden Variety Flower Shop uses 750 clay pots a month. The pots are purchased at $2 each. Annual
carrying costs per pot are estimated to be 30 percent of costs, and ordering costs are $20 per order. The
manager has been using an order size of 1,500 flower pots.
a. What additional annual cost is the shop incurring by staying with this order size?
b. Other than cost savings, what benefit would using the optimal order quantity yield?
Problem #12-5:
A mail-order house uses 18,000 boxes a year. Carrying costs are 60 cents per box a year, and ordering
costs are $96. The following price schedule applies. Determine
a. the optimal order quantity
b. the number of orders per year.
Number of Boxes
Price per Box
1000 to 1999
1.25
2000 to 4999
1.20
5000 to 9999
1.15
10000 or more
1.10
Problem #12-6:
The friendly Sausage Factory (FSF) can produce hot dogs at a rate of 5,000 per day. FSF supplies hot
dogs to local restaurants at a steady rate of 250 per day. The cost to prepare the equipment for
producing hot dogs is $66. Annual holding costs are 45 cents per hot dog. The factory operates 300
days a year. Find:
a. the optimal run size
b. the number of runs per year
c. the length (in days) of a run
Problem #12-7:
A company is about to begin production of a new product. The manager of the department that will
produce one of the components for the product wants to know how often the machine used to produce
the item will be available for other work. The machine will produce the item at a rate of 200 units per
day. Eighty units will be used daily in assembling the final product. Assembly will take place five
days a week, 50 weeks a year. The manager estimates that it will take almost a full day to get the
machine ready for a production run, at a cost of $300. Inventory holding costs will be $10 a year.
a. what run quantity should be used to minimize total annual costs?
b. what is the length of a production run in days?
c. during production, at what rate will inventory build up?
Problem #12-8:
A production facility is trying to determine when to Reorder more products. They have a monthly
demand of 3,000 items, they are open 200 days per year, and there is a 5-day lead time for the item. What
is the correct ROP (ReOrder Point)?
Problem #12-9:
Bolton Electric wants to determine the quantity that will help them to receive the lowest total cost for the
supplies they purchase. Bolton Electric uses 1,000 light bulbs per year. Light bulbs are priced with the
following pricing tiers: 1-49 = $25.00 each, 50-99 = $23.75 each, 100 - 149 = $23.00 each, and 150+ =
$21.00 each. It costs Bolton Electric $75 to receive an order and $50 to carry/hold it on an annual basis.

Page 3
Ch 12 – Inventory Mgt
Practice Problems
What is the EOQ?
How many light bulbs should Bolton Electric buy each time?
What is the lowest total cost at the optimal order quantity?
Problem #12-10:
An organization has a total of 10,000 SKU's in inventory, and 65% of the items are classified as C items,
25% are classified as B items, and 10% are classified as A items. There policy is to count the "A" items
every month (22 working days), "B" items every quarter (66 working days), and "C" items every 6
months (132 days). How many "A" items will be cycle counted per day?
Problem #12-11:
A computer production facility has an Annual Demand of 10,000 Computers. The Economic Order
Quantity is 75. They operate 180 days per year. What is the expected time between orders?
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Solution #12-1:
ABC Inventory Analysis - Welsh
Corporation
Projected
Projected
Cumulative
Cumulative
Item
Annual
Annual
Dollar
Percent
Number
Usage
Unit Cost
Dollar Usage
Usage
of Total
397
17,300
$5.00
$86,500
$86,500
55.14%
008
22,500
$1.20
$27,000
$113,500
72.35%
971
2,950
$7.50
$22,125
$135,625
86.46%
713
1,000
$10.50
$10,500
$146,125
93.15%
419
8,500
$0.45
$3,825
$149,950
95.59%
887
6,200
$0.41
$2,542
$152,492
97.21%
916
700
$3.20
$2,240
$154,732
98.64%
219
12,000
$0.10
$1,200
$155,932
99.40%
654
350
$2.10
$735
$156,667
99.87%
007
225
$0.90
$203
$156,870
100.00%
One possible ABC classification scheme is A items (397, 008, 971) with 30% of items accounting for
86.5% of total inventory value; B items (713, 419) with 20% of items accounting for 9.1% of total
inventory value; C items (887, 916, 219, 654, 007) with 50% of items accounting for 4.4% of total
inventory value. Since there are no absolute guidelines on ABC analysis students might, for example,
define A items as 397 and 008 (20% of the items and 72.4% of the value) and this is fine.

Page 4
Ch 12 – Inventory Mgt
Practice Problems
Solution #12-2:
Item
Unit
Cost
Usage
Dollar Usage
Category
F95
30
800
24,000
A
Z45
80
250
16,000
A
K35
25
600
15,000
A
P05
16
500
8,000
B
F14
20
300
6,000
B
D45
10
550
5,500
B
K36
36
150
5,400
B
D57
40
120
4,800
B
K34
10
200
2,000
C
D52
15
110
1,650
C
M20
20
80
1,600
C
F99
20
60
1,200
C
N08
30
40
1,200
C
D48
12
90
1,080
C
M10
16
25
400
C
P09
10
30
300
C
Solution #12-3:
D = 4,860 bags/yr.
S = $10
H = $75
a.
b. Q*/2 = 36/2 = 18 bags
c.
d.
Solution #12-4:
D = 750 pots/mo. x 12 mo./yr. = 9,000 pots/yr.
Price = $2/pot, S = $20 H = ($2)(.30) = $0.60/unit/year
a.

Page 5
Ch 12 – Inventory Mgt
Practice Problems
TC = 232.35 + 232.36
= 464.71
If Q = 1500
TC = 120 + 450 = $570
Therefore the additional cost of staying with the order size of 1,500 is:
$570 – $464.71 = $105.29
b. Only about one half of the storage space would be needed.
Solution #12-5:
D = 18,000 boxes/yr.
S = $96
H = $0.60/box per yr.
a. Q* =
Since this quantity is feasible in the range 2000 to 4,999, its total cost and the total cost of all
lower price breaks (i.e., 5,000 and 10,000) must be compared to see which is lowest.
TC2,400 =
TC5,000 =
TC10,000 =
b.
Solution #12-6:
p = 5,000 hotdogs/day
u = 250 hotdogs/day
300 days per year
S = $66
H = $.45/hotdog per yr.
a.
b. D/Q* = 75,000/4,812 = 15.59, or about 16 runs/yr.
c. run length: Q*/p = 4,812/5,000 = .96 days, or approximately 1 day
D= 250/day x 300 days/yr. = 75,000
hotdogs/yr.