Practice Questions

OM II
Practice questions
1. Thomas Kratzer is the purchasing manager for the headquarters of a large insurance company
chain with a central inventory operation. Thomas’s fastest-moving inventory item has a demand
of 6,000 units per year. The cost of each unit is $100, and the inventory carrying cost is $10 per
unit per year. The average ordering cost is $30 per order. It takes about 5 days for an order to
arrive, and the demand for 1 week is 120 units. (This is a corporate operation, and there are 250
working days per year.)
a) What is the EOQ? Ans: 94.87

b) What is the average inventory if the EOQ is used? Ans: 94.87
c) What is the optimal number of orders per year? Ans: 31.62
d) What is the annual cost of ordering and holding inventory? Ans: $1,897.3
e) What is the total annual inventory cost, including the cost of the 6,000 units? Ans: $601,897.3
2. Radovilsky Manufacturing Company, in Hayward, California, makes flashing lights for toys. The
company operates its production facility 300 days per year. It has orders for about 12,000 flashing
lights per year and has the capability of producing 100 per day. Setting up the light production
costs $50. The cost of each light is $1. The holding cost is $0.10 per light per year.
a) What is the optimal size of the production run? Ans: 4472 lights per run
b) What is the average holding cost per year? Ans: $134.16
c) What is the average setup cost per year? Ans: $134.16
d) What is the total cost per year, including the cost of the lights? Ans: $ 12,268.32/year
3. Race One Motors is an Indonesian car manufacturer. At its largest manufacturing facility, in
Jakarta, the company produces subcomponents at a rate of 300 per day, and it uses these
subcomponents at a rate of 12,500 per year (of 250 working days). Holding costs are $2 per item
per year, and ordering (setup) costs are $30 per order.
a) What is the economic production quantity? Ans: 671

b) How many production runs per year will be made? Ans: 18.63
c) What will be the maximum inventory level? Ans: 559
d) What is the annual cost of ordering and holding inventory? Ans: $1,117.9
4. Bell Computers purchases integrated chips at $350 per chip. The holding cost is $35 per unit per
year, the ordering cost is $120 per order, and sales are steady, at 400 per month. The company’s
supplier, Rich Blue Chip Manufacturing, Inc., decides to offer price concessions in order to attract
larger orders. The price structure is shown below.
Quantity purchased Price/unit
1-99 units $ 350
100-199 units $ 325
200 or more units $ 300
a) What is the optimal order quantity and the minimum annual cost for Bell Computers to order,
purchase, and hold these integrated chips? Ans: 200 units, $1,446,380
b) Bell Computers wishes to use a 10% holding cost rather than the fixed $35 holding cost in (a).
What is the optimal order quantity, and what is the optimal annual cost? Ans: 200 units,
$1,566,119.
5. Plan production for the next year. The demand forecast is: spring, 20,000; summer, 10,000; fall,
15,000; winter, 18,000. At the beginning of spring you have 70 workers and 1,000 units in
inventory. The union contract specifies that you may lay off workers only once a year, at the
beginning of summer. Also, you may hire new workers only at the end of summer to begin regular
work in the fall. The number of workers laid off at the beginning of summer and the number hired
at the start of fall should result in planned production levels for summer and fall that equal the
demand forecasts for summer and fall, respectively. If demand exceeds supply, use overtime in
spring only, which means that backorders could occur in winter. You are given these costs: hiring,
$100 per new worker; layoff, $200 per worker laid off; holding, $20 per unit-quarter; backorder
cost, $8 per unit; straight-time labor, $10 per hour; overtime, $15 per hour. Productivity is 0.5 unit
per worker hour, eight hours per day, 50 days per quarter. Find the total cost.
Ans: $ 1,260,500
6. Grace Greenberg, production planner for Science and Technology Labs, in New Jersey, has the
master production plan shown below:
Lead time = 1 period; setup costs = $200; holding cost = $10 per week; stockout cost = $10 per
week. Develop an ordering plan and costs for Grace, using these techniques:
a) Lot-for-lot.
b) EOQ.
c) POQ.
d) Which plan has the lowest cost?
Ans:
a) Lot-for-lot
i. Setups = 6 * 200 = $1,200
ii. Holding cost = $10 * 0 = $0
iii. Total cost = Setup + Holding = 1,200 + 0 = $1,200
b) EOQ
EOQ=23
iv. Setups = 5 * 200 = $1,000
v. Holding cost = $10 * 137 = $ 1,370
vi. Total cost = Setup + Holding = $2,370
c) POQ
EOQ=23, Avg demand = 13.75, 2 periods
vii. Setups = 5 * 200 = $1,000
viii. Holding cost = $10 * 10 = $100
ix. Total cost = Setup + Holding = 1,000 + 100 = $1,100
d) Periodic order quantity yields the lowest cost, $1,100, for this unique 12-week period.

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OM II

a) What is the EOQ? Ans: 94.87

a) What is the economic production quantity? Ans: 671

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