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Assignment Model Answer

Problem#2
A large bakery buys flour in 25-pound bags. 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 carrying 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 cost of ordering and carrying flour.
(E) If ordering costs were to increase by $1 per order, how much that would affect
the minimum total annual cost?

ANSWER
D = 4,860 bags/yr.
S = $10
H = $75
a.

2DS

2( 4,860)10
36 bags
75

b. Q/2 = 36/2 = 18 bags


c.

D
4,860 bags

135 orders
Q 36 bags / orders
D

d. TC Q / 2H Q S

36
4,860
(75)
(10) 1,350 1,350 $2,700
2
36

e. Using S = $5, Q =
TC

2(4,860)(11)
37.757
75

37.757
4,860
(75)
(11) 1,415.89 1,415.90 $2,831.79
2
37.757

Increase by [$2,831.79 $2,700] = $131.79

Problem#3

A large law firm uses an average of 40 boxes of copier paper a day. The firm operates 260
days a year. Storage and handling costs for the paper are $30 a year per box, and its costs
approximate $ 60 to order and receive a shipment of paper.
(A) What order size would minimize the sum of annual ordering and carrying costs?
(B) Compute the total annual cost using your order size from part a?
(C) Except for rounding, are annual ordering and carrying costs always equal at EOQ?
(D) The office manager is currently using an order size of 200 boxes. The partners of
the firm expect the office to be managed "in a cost-efficient manner." Would you
recommend that the office manages use the optimal order size instead of 200
boxes? Justify your answer.

ANSWER
D = 40/day x 260 days/yr. = 10,400 packages
S = $60 H = $30
a.

Q0

2DS

b.

TC

Q
D
H S
2
Q

2(10,400)60
203.96 204 boxes
30

204
10,400
(30)
(60) 3,060 3,058.82 $6,118 .82
2
204

c. Yes
d. TC 200

200
10,400
(30)
(60)
2
200

TC200 = 3,000 + 3,120 = $6,120


6,120 6,118.82 (only $1.18 higher than with EOQ, so 200 is acceptable.)

Problem#5
The friendly Sausage factory (FSF) can produce hot dogs at a rate of 5,000 units per
day. FSF supplied hot dogs to local restaurant at a steady state rate of 250 per day. The
cost to prepare equipment for producing hot dog is $66. Annual holding cost is 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.
ANSWER
p = 5,000 hotdogs/day
u = 250 hotdogs/day
D= 250/day x 300 days/yr. = 75,000 hotdogs/yr.
300 days per year
S = $66
H = $.45/hotdog per yr.
a.

Q0

2DS
H

pu

2(75,000)66
.45

5,000
4,812.27 [round to 4,812]
4,750

b. D/Qo = 75,000/4,812 = 15.59, or about 16 runs/yr.


c. run length: Qo/p = 4,812/5,000 = .96 days, or approximately 1 day

Example: A local distributor for a national tire company expects to sell


approximately 9,600 steel belted radial tires of a certain size and tread
design next year. Annual carrying cost is $16 per tire, and ordering cost is
$75. The distributor operates 288 days a year.
a.

What is the EOQ?


b. How many times per year does the store reorder?
c. What is the length of an order cycle?
d. What is the total annual cost if the EOQ quantity is ordered?

Solution:
D = 9,600 tires per year
H = $16 per unit per year
S = $75

a.
b.
c.

d.

Problem#6
A chemical firm produces sodium bisulphate in 100-pound bags. Demand for this
product is 20 tons per day. The capacity for producing the product is 50 tons per day.
Setup cost $100 and storage and handling cost are $5 per ton a year. The firm operates
200 days a year. (Note 1 ton = 2000 pounds)
a) How many bags per run are optimal?
b) What would the average inventory be for this lot size?
c) Determine the approximate length of a production run in days?
d) About how many runs per year would there be?
e) How much could the company save annually if the setup cost reduced to $25
per run?

ANSWER
p = 50/ton/day
u = 20 tons/day
D= 20 tons/day x 200 days/yr. = 4,000 tons/yr.
200 days/yr.
S = $100
H = $5/ton per yr.
a.
Q0

2DS
H

b.

pu

I max

2(4,000)100
5

50
516.40 tons [10,328 bags]
50 20

Q
516.4
(p u )
(30) 309.84 tons [approx. 6,196.8 bags]
P
50

Average is

I max 309.48
:
154.92 tons [approx. 3,098 bags]
2
2

c. Run length =

Q 516.4

10.33 days
P
50

d. Runs per year:

D
4,000

7.75 [approx. 8]
Q
516.4

e. Q = 258.2
TC =

I max
D
H S
2
Q

TC orig. = $1,549.00
TC rev. = $ 774.50
Savings would be

$774.50

Highland Electric Co. buys coal from Cedar Creek Coal Co. to generate electricity.
CCCC can supply coal at the rate of 3,500 tons per day for $10.50 per ton. HEC uses
the coal at a rate of 800 tons per day and operates 365 days per year.
HECs annual carrying cost for coal is 20% of the acquisition cost, and the
ordering cost is $5,000.
a) What is the economical production lot size?
b) What is HECs maximum inventory level for coal?

Economical Production Lot Size

d = 800 tons/day;

D = 365(800) = 292,000 tons/year

p = 3,500 tons/day
S = $5,000/order

H = .20(10.50) = $2.10/ton/year

42,455.5

tons per order

Total Annual Stocking Cost (TSC)


TSC = (Q/2)((p-d)/p)H + (D/Q)S
= (42,455.5/2)((3,500-800)/3,500)(2.10)
+ (292,000/42,455.5)(5,000)
= 34,388.95 + 34,388.95
= $68,777.90
Maximum Inventory Level
= Q(p-d)/p
= 42,455.5(3,500 800)/3,500
= 42,455.5(.771429)
= 32,751.4 tons

EOQ is the Economic Order Quantity and signifies the optimal order size. So, every
time one places an order, the order size should be equal to EOQ. EOQ is a very
popular concept in the industry and has a standard way of calculating it. This problem
has additional things apart from EOQ i.e. discounting for purachsinglarge quantities.
In this problem, we need to determine optimal order quantity by determining total
costs for EOQ and other order quantities as well.
Solution :
a)
AnnualDemand, D = 18,000 units
Carrying costs,h =60 cents per year
Ordering Cost,K = $ 96 per order
EOQ = SQRT(2*D*K/h) = SQRT(2*18000*96/.6)
=SQRT(5760000)
= 2400 units
So, optimal order quantity is 2400 units per order.

Total cost = Purchasing cost + Ordering COst + Carrying Cost

Purchasing cost = Total demand* Cost per unit


Ordering COst = No. of orders* Ordering cost per order
Carrying cost = carrying cost per unit* Avg Inventory

1) Order quantity = 1000 units


Total cost = 18000*1.25 + (18000/1000)*96 + (1000/2)*0.6 = $ 24,528
Purchase Cost
Ordering Cost
Holding COst

22500
1728
300

2) Order Quantity = 2000


Cost = 1.2 per unit
Total cost = 18000*1.2+ (18000/2000)*96 + (2000/2)*0.6 = $ 23064
Purchase Cost 21600
Ordering Cost
864
Holding COst
600

3) Order Quantity = EOQ = 2400


Cost = 1.2 per unit
Total cost = 18000*1.2+ (18000/2400)*96 + (2400/2)*0.6 = $ 23040
Purchase Cost
Ordering Cost
Holding COst

21600
720
720

4) Order Quantity =5000


Cost = 1.15per unit
Total cost = 18000*1.15+ (18000/5000)*96 + (5000/2)*0.6 = $ 22545.6

Purchase Cost
Ordering Cost
Holding COst

20700
345.6
1500

5) Order Quantity = 10000


Cost = 1.15per unit
Total cost = 18000*1.1+ (18000/10000)*96 + (10000/2)*0.6 = $ 22972.8
Purchase Cost
Ordering Cost
Holding COst

19800
172.8
3000

Since cost is minimum in the case of order quantity = 5000 units with cost =$
22545.6, the optimal order quantity is 5000 units.

b)
Number of orders per year = Annual Demand/ Optimal order quantity
= 18000/5000
= 3.6 orders per year
Therefore, the mail order house should place 3.6 orders per year