Q.1 The production department of a company requires 3600 kg of raw material for
manufacturing a particular item per year. It has been estimated that the cost of
placing an order is Rs. 36 and the cost of carrying inventory is 25 % of the
investment in the inventories. The price is Rs. 10 per kg. Help the purchase
manager to determine the optimal order quantity, minimum yearly variable
inventory cost and total minimum yearly inventory cost.
Q.2 A company that operates for 50 weeks in a year is concerned about its stocks
of copper cable. This costs Rs. 240 per meter and there is a demand for 8000
meters per week. Each replenishment costs Rs. 1050 for administration and Rs.
1650 for delivery, while holding costs are estimated at 25% of value held a year.
Assuming no shortages are allowed, what is the optimal inventory policy for the
company?
How would this analysis differ if the company wanted to maximize its profits rather
than minimize cost? What is the gross profit if the company sells the cable for Rs.
360 per meter.
Q.3 Each unit of an item costs a company Rs. 40. Annual holding costs are 18% of
unit cost for interest charges, 1% for insurance, 2% allowances for obsolescence Rs.
2 for building overheads, Rs. 1.5 for damage and loss, and Rs. 4 for miscellaneous
costs. The annual demand for the item is constant at 1000 units. Placing each order
costs the company Rs. 100.
(i) Calculate Economic Order Quantity (EOQ) and the total costs associated with
stocking the item.
(ii) If the supplier of the item will only deliver batches of 250 units, how are the
stock holding costs affected?
(iii) if the supplier relaxes his order size requirement, but the company has limited
warehouse space and can stock a maximum of 100 units at any time, what would
be the optimal ordering policy and associated costs.
Q.4 A chemical company is trying to find the optimal batch size for the reorder of
concentrated sulphuric acid. The management accountant has supplied the
following information:
(i) The purchase price of H2SO4 is Rs. 150 per gallon.
(ii) The clerical and data processing costs are Rs. 500 per order
All the goods are transported by rail. Each time the special line to the factory is
opened, the company is charged Rs. 2000. A charge of Rs. 20 per gallon is also
made. The company uses 40000 gallons per year. Maintenance costs of stock are
Rs. 200 per gallon per year. Each gallon requires 0.5 Sqft. of storage space. If
warehouse space is not used, it can be rented out to another company at Rs. 200
per sqft per annum. The available warehouse is 1000 sqft and the overhead costs
being Rs. 5000 per annum. Assume that all free warehouse space can be rented
out.
(i)
(ii)
Calculate EOQ
Calculate the minimum total annual cost of holding and reordering stock.
100<=Q2<200
200<=Q3
18
16
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.
Q.12 Find the optimum order quantity of a product for which the price breaks are as
follows:
Quantity Range
0<Q1<500
500<=Q2<750
750<=Q3
9.25
8.75
The monthly demand for the product is 200 units. The storage cost is 2% of the unit
cost of the product and the cost of ordering is Rs. 350 per order.