1.

company’s books of accounts revealed the following

Staffs salaries of purchase Dept. = Rs. 250000

Expenses incurred in ware-house personnel salaries = Rs. 275000
Cost of security for warehouse = Rs. 80000
Travelling and purchase follow up expenses = Rs. 80000
Taxes and insurance = 1% pa
Interest rate on inventory value =20% p.a.
Cost of bills payment = Rs. 30000
Cost of handling in store = Rs. 150000
Obsolescence and pilferage = Rs. 20000
Cost of In-ward inspection = Rs. 48000
The Co. has an average inventory of Rs. 60 lakh and has placed 3400 orders in the
year of review. Calculate the cost per order and inventory carrying cost as %
based on the above costs. What would be the EOQ, if the annual demand of an
item is 12000 numbers and unit price is Rs. 60 per unit?
2. An auto industry purchases spark plugs at the rate of Rs. 25 per piece. The annual
consumption of spark plug is 18000 nos. If the ordering cost is Rs. 250 per order and
carrying cost is 25% p.a. What would be the EOQ? If the supplier of spark plugs
offers a discount of 5% for order quantity of 3000 no’s per order, Do you accept the
discount offer?

3. For a given item of constant demand rate of 60000 units p.a., the unit price is Rs.
60/-, the ordering cost per order is Rs. 600/- and the carrying cost is 30% p.a. on
average inventory value. What would be the total cost at optimal order quantity? The
vendor is offering a quantity discount of 5% if 20000 units are purchased at a time.
The shelf life of the item is three months. Do you accept the discount offer? Give
reasons for your decision.

4. The ABC Fun novelty Co. buys 80000 shipping containers per year. Price of each
container is Rs. 0.40. Cost of purchase is Rs. 80 per order, cost of handling one
container per year= Rs. 0.10. Bank rate of interest is 15% including a charge for
taxes and insurance. Find

a) The EOQ and time between orders based on 220 working days per year.

b) The minimum variable cost per year

 c) If the Co. had been following a policy of quarterly ordering, what would
have been the increase in the variable cost?

5. Determine safety stock, reserve stock and buffer stock for the data given below:

Normal usage = 100 per week

Lead time = 4 to 6 weeks

Minimum usage = 50 per week

Maximum usage = 150 per week

Re-order quantity = 600 nos.

Also calculate the re-order level, minimum and maximum levels of inventory and
also average inventory level.

6. A Co. uses 1200 units per month of an electronic component each costing Rs. 2/-.
Placing each order cost Rs. 50/- and the carrying cost is 6% per year of the average
inventory. Find

i. EOQ

ii. If the Co. gets 5% discount if it places single order, should they accept the
discount offer?

iii. Find break-even discount % which matches EOQ ordering.

7. A factory uses annually 24000 units of raw material which costs Rs. 1.25 per unit.
Placing each order costs Rs. 25/- and carrying cost is 6% per year of the average
inventory. Find

i. The EOQ and the total inventory cost including the cost of material

ii. The factory works for 320 days a year. If the procurement time is 10 days
and safety stock is 450 units, find the reorder point, the minimum,
maximum and average inventories.

8. The demand for a certain item is random. It has been estimated that the monthly
demand of the item has a normal distribution with a mean of 680 and a SD of 130
units. The unit price of the item is Rs. 10/-. The ordering cost is Rs. 20/-, the
 inventory carrying cost is estimated to be 25 % per year respectively. The
procurement lead time is constant and is one week. Find the most economic ordering
policy and the expected cost of controlling inventory, given that the service level is
97.5%.

9. Veena industries, manufacturers of computer peripherals, require certain items

costing Rs. 3.75 each. The annual demand is 24000 nos. Average lead time is 6
weeks and the demand per week is 460 with a SD of 50 nos. per week. The Co.
stipulates the policy of maintaining a service level of 95 % (K= 1.64). Though
normal lead time is 6 weeks, it is fluctuating and maximum lead time that occurred is
10 weeks. The cumulative probability of its occurrence i.e., 7, 8, 9, 10 weeks is 0.25.
The ordering cost is Rs. 180 per order and the inventory carrying cost is 30% p.a.
Based on the above info, design fixed order quantity inventory system and explains
how it operates.

10. XYZ Co. uses fixed period replenishment system for planning its inventory of
consumable material for one such item, the average consumption is 120 units/month,
lead time for procurement is 6 months and review period is 3 months. Work out the
replenishment level and order quantity at the time of first review, if the stock on
hand is 520 units and that on order is 150 units.

11. A warehouse purchases hand tools from various suppliers and then distributes them
on demand to retailers. The warehouse operates 5 days per week, 52 weeks per year.
The following data are estimated 3/8’’ hand drills-

Average daily demand = 100 nos.

SD on daily demand = 30 nos.

Lead time = 3 days.

Inventory carrying cost = Rs. 9.30 per unit per year

Ordering cost = Rs. 35 per order

Service level = 92%

Safety factor, k= 1.40

The warehouse uses a continuous review system. Calculate

 a) EOQ

b) Re-order level

c) If on hand inventory is 40 units and there is an open order for 442 drills
and no back orders, should a new order be placed?

12. A Co’s annual requirement of an item is 10000 units. The ordering cost per order is
Rs 20/- and the carrying cost per unit is Re. 0.30. The discount schedule offered by
the supplier is as below

Lot-size
Discount per unit(Rs.)
1 to 999
Nil
1000 to 1499
0.01
1500 to 2499
0.02
2500 to 4999
0.03
5000 and
0.04
above

Determine the EOQ.

13. The following details are available in respect of a firm.

Annual demand for an item = 6000 units

Unit price = Rs. 5/-

Cost of placing an order = Rs. 60/-

Carrying cost per unit per year = Re. 1/-

Determine the EOQ by trial and error method and cross-check the same using the
mathematical formula.
14. From the following data, draw an ABC analysis graph after classifying A, B, C class
items.
Item Unit price Annual Consumption ( units)

1 200.0 3000

2 2.0 60000

3 500.0 20

4 12.5 200

5 9.0 350

6 25.0 6000

7 1000.0 40

8 70.0 300

15. The following data are available on consumption pattern of certain materials in an
organization.

Group No of items Monthly consumption(units) Price/item (Rs.)

 I 40 3000 90

II 20 270 100

III 100 1700 5

IV 200 1500 4

V 60 340 50

VI 300 2500 1

VII 250 2000 2

VIII 30 170 500

Find out A, B, C items when

‘A’ item Accounts for 85% of consumption value

‘B’ item accounts for 10% of consumption value

‘C’ item accounts for 5% of consumption value

16. Data regarding materials used by a certain manufacturing unit is furnished as below

Item code Unit cost (Rs.) Annual consumption(units)

3637 1.20 6850

8061 8.60 371

3195 13.18 1292

2321 91.80 62

4023 3.20 12667

4094 10.18 9625

4881 1.27 7010

3121 0.88 5100

6846 62.25 258

8355 18.10 862

1726 0.38 1940

0093 2.20 967

The management classifies items accounting for the top 71%(approx) of the total
annual cash outflow on this account as ‘A’ category and item accounting for the
bottom 7.5% of the annual cash flow as ‘C’ category and the remaining ‘B’
category item. It follows a policy of quarterly ordering for ‘A’ category items,
half-yearly ordering ‘B’ items and annual ordering for ‘C’ items. Calculate the
annual variable cost of this policy if the cost of ordering is Rs. 200/- per order and
the annual inventory carrying cost is 25%. Assume that each item is supplied by a
separate supplier.

The Management now wishes to change the ordering system, in respect of ‘A’
category item to a fixed quantity, variable interval system based on EOQ, while
continuing the extent practice in respect of B & C items. What would be your
recommendation?