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Practice Questions on Inventory Management

Chapter 6

For practice on problems related to Chapter 6, you can work through the Problems 6.1 - 6.5 from the back of the chapter. (In doing so, interpret "annual costs" as total controllable costs.)

Problem 6.1

Suppose you purchase from a supplier at $4 per unit a part with which you assemble rd widgets. On average, you use 50,000 units of this part each year. Every time you order this particular part, you incur a sizeable ordering cost of $800 regardless of the number of parts you order. Your cost of capital is 20% per year.

a. How many parts should you purchase each time you place an order?

b. To satisfy annual demand, how many times per year will you place orders from this part?


The data in the question is: throughput rate R = 50,000 parts/yr, fixed setup cost S = $800, purchasing cost C = $4/part, cost of capital r = 200%/yr, and physical storage cost h = 0%/yr. Thus the annual unit holding cost is H = (r+h)C = $0.80/part/yr. The economic order quantity tells us to purchase each time:

a. [pic]

b. Order R/Q = 5 times per year.

Problem 6.2

BIM Computers Inc. sells its popular PC-PAL model to distributors at a price of $1,250 per unit. BIM’s profit margin is 20%. Factory orders average 400 units a week. Currently, BIM works in a batch mode and produces a 4-week supply in each batch. BIM’s production process involves three stages:

• PC board assembly (the automatic insertion of parts and the manual loading, wave soldering, and laser bonding of electronic components purchased from outside sources),

• Final assembly, and

• Testing.

When the firm wants to change production from one model to another, it must shut down its assembly line for half a way. The company estimates that downtime costs one-half hour of supervisory time and an additional $2,000 in lost production and wages paid to workers directly involved in changeover operations. Salaries for...