Inventory Management Practice Exercises

1. What is the re-order point (R/ROP) given an average daily demand of 50 units and a lead time of 10 days?

2. If annual demand is 12,000 units, the ordering cost is $6 per order and the holding cost is $2.50 per unit per year, what is the optimal order quantity using the Economic Order Quantity model?

3. Annual demand is 50,000 units, the ordering cost is $25 per order and the holding cost is $5 per unit per year.

a) What is the Annual Holding Cost function (formula)?
b) What is the Annual Ordering Cost function (formula)?
c) What is the Total Cost function (formula)?

4. An electronic company wishes to determine the best order size for its best selling data storage equipment. The company has estimated the annual demand of 1000 units. The holding (carrying cost) is 10% of selling price of $1000 and the ordering cost is $25 to place.

a) What are the annual holding cost, annual ordering cost and total cost functions for this company?
b) Determine the economic order quantity.
c) What is the average storage equipment on hand (average inventory)?
d) How many orders per year will there be?
e) What is the time between each order?
f) What is the minimum total annual cost?
g) Annual sales is expected to increase by 50% next year, how would the EOQ changes?

5. A particular raw material is available to a company at three different prices, depending on the size of the order:

            Less than 100 pounds                $20 per pound

            100 pounds to 1000 pounds       $19 per pound

            More than 1000 pounds             $18 per pound

The cost to place an order is $40. The annual demand is 3,000 pounds. Holding (or carrying) cost is $4.75 per pound. Should the company take advantage of the price break? What would be the order size?

6. The graph below shows the Economic Order Quantity model. On the graph, clearly identify:

Annual Holding Cost Function
Annual Ordering Cost Function
Total Cost Function
Optimal Order Quantity