Group work I
1. Lila Battle has determined that the annual demand for number 6 screws is 100,000 screws. Lila,
who works in her brother’s hardware store, is in charge of purchasing. She estimates that it
costs $10 every time an order is placed. The cost includes her wages, the cost of the forms used
in placing the order, and so on. Furthermore, she estimates that the cost of carrying one screw
in inventory for a year is one-half of 1 cent. Assume that the demand is constant throughout the
year.
(a) How many number 6 screws should Lila order at a time if she wishes to minimize the total
inventory cost.
(b) How many orders per year would be placed? What would the annual ordering cost be?
(c) What would the average inventory be? What would annual holding cost be?
(d) It takes approximately 8 working days for an order of number 6 screws to arrive once the
order has been placed. The demand for number 6 screws is fairly constant, Lila believes that she
can avoid stockouts completely if she only orders the number 6 screws at the correct time.
What is the ROP?
2. Barbara Bright is the purchasing agent for West Valve Company. West Valve sells industrial
valves and fluid control devices. One of the most popular valves is the Western, which has an
annual demand of 4,000 units. The cost of each value is $90, and the inventory carrying cost is
estimated to be 10% of the cost of each valve. Barbara has made a study of the cost involved in
placing an order for any of the valves that West Valve stocks, and she has concluded that the
average ordering cost is $25 per order. Furthermore, it takes about two weeks for an order to
arrive from a supplier, and during this time the demand per week for West Valve is
approximately 80.
(a) What is the EOQ?
(b) What is the ROP?
(c) What is the average inventory? What is the annual holding cost?
(d) How many orders per year would be placed? What is the annual ordering cost?
3. Thaarugo, Inc., produces a GPS device that is becoming popular in parts of Scandinavia. When
Thaarugo produces one of these, a printed circuit board (PCB) is used, and it is populated with
several electronic components. Thaarugo determines that it needs about 16,000 of this type of
PCB each year. Demand is relatively constant throughout the year, and the ordering cost is
about $25 per order: the holding cost is 20% of the price of each PCB. Two companies are
competing to become the dominant supplier of the PCBs, and both have now offered discounts,
as shown in the following table. Which of the two suppliers should be selected if Thaarugo
wishes to minimize total annual inventory cost? What would be the annual inventory cost?
Supplier A Supplier B
Quantity Price Quantity Price
1-199 38.40 1-299 39.50
200-499 35.80 300-999 35.40
500 or more 34.70 1000 or more 34.60
4. Harry’s Hardware does a brisk business during the year. During Christmas, Harry’s Hardware
sells Christmas trees for a substantial profit. Unfortunately, any trees not sold at the end of the
season are totally worthless. Thus, the number of trees that are stocked for a given season is a
very important decision. The following table reveals the demand for Christmas trees:
Demand for Christmas trees Probabilty
50 0.05
75 0.10
100 0.20
125 0.30
150 0.20
175 0.10
200 0.05
Harry sells trees for $80 each, but his cost is only $20.
(a) Use marginal analysis to determine how many trees Harry should stock at his hardware
store.
(b) If the cost increased to $35 per tree and Harry continues to sell trees for $80 each, how
many trees should Harry stock?
(c) Harry is thinking about increasing the price to $100 per tree. Assume that the cost per tree is
$20. With the new price, it is expected that the probability of selling 50, 75, 100, or 125 trees
will be 0.25 each. Harry does not expect to sell more than 125 trees with this price increase.
What do you recommend?
5. In addition to selling Christmas trees during the Christmas holidays, Harry’s Hardware sells all
the ordinary hardware items. One of the most popular items is Great Glue HH, a glue that is
made just for Harry’s Hardware. The selling price is $4 per bottle, but unfortunately, the glue
gets hard and unusable after one month. The cost of the glue is $1.20. During the past several
months, the mean sales of glues have been 60 units, and the standard deviation is 7. How many
bottles of glue should Harry’s Hardware stock? Assume that sales follow a normal distribution.
