1. A museum of natural resources opened a gift shop two years ago. Managing inventories
has become a problem. Low inventory turnover is squeezing profit margins and causing
cash-flow problems.
The top- selling items at the museum’s gift shop is a bird feeder. Sales are 18 units per
week, and the supplier charges $60 per unit. The cost of placing an order with the
supplier is $45. Annual holding cost is 25 percent of a feeder’s value, and the museum
operates 52 weeks per year. Management chose a 390-unit lot size so that new orders
could be placed less frequently.
a) What is the annual total cost of the current policy of using a 390-unit lot size?
b) Would a lot size of 468 be better?
c) Calculate the EOQ and its total annual cycle -inventory cost. How frequently will
order be placed if the EOQ is used?
Solutions:
D = (18 units/weeks) (52 weeks/year) = 936 units
H = 0.25($60/unit) = $15 per unit per year
a) For a 390-unit lot size,
390 936
TC = (H) + ($45) = $2925 + $108 = $3033
2 390
c)
2𝐷𝑆 2(936)(45)
𝑄𝑜 = √ = √ = 74.94, or 75 units,
𝐻 15
75 936
TC = = ($15) + ($45)
2 75
TC = $1,124.10
Solution
D = 18,000 boxes/yearr.
S = $96
H = $.60/box per year.
2DS 2(18,000)96
a) Qo = 2,400 boxes
H .60
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.
2,400 18,000
TC2,400 = (.60) ($96) $1.20(18,000) $23,040
2 2,400
5,000 18,000
TC5,000 = (.60) ($96) $1.15(18,000) $22,545.6 [lowest ]
2 5,000
10,000 18,000
TC10,000 = (.60) ($96) $1.10(18,000) $22,972.80
2 10,000
Hence, the best order quantity would be 5,000 boxes.
Lowest TC
TC
b. What should the reorder point be for the bar of soap if management wants to have
a 99 percent service level?
4. A Fish Market buys bluefish daily for $4.20 per pound and sells it for $5.70 per pound. At
the end of each business day, any remaining bluefish is sold to a producer of cat food for
$2.40 per pound. Daily demand can be approximated by a normal distribution with a
mean of 80 pounds and a standard deviation of 10 pounds. What is the optimal stocking
level?
Solution
Cs = Rev – Cost = $5.70 – $4.20 = $1.50/unit
Ce = Cost – Salvage = $4.20 – $2.40 = $1.80/unit
SL = Cs/ Cs + Ce) = $1.50/ ($1.50 + $1.80) = .4545
d = 80 lb./day
d = 10 lb./day