Operations Management

Question

Item X is a standard item stocked in a company's inventory of spare parts. Each year, the firm uses about 2,000 units of Item X, which costs Php 1,000 per unit. Storage costs, which include insurance and cost of capital, amount to 18 percent of item unit cost. Placing an order for more of Item X costs Php 400. The company operates 360 days per year and Item X is received 9 days after placement of order.

 

1.How many units of Item X should be ordered each time?

a. 94 units

b. 95 units

c. 100 units

d. 2,000 units

 

2.When should Item X be ordered?

a. 50 times a year

b. Every 50 days

c. Every 9 days

d. Whenever Item X's inventory level drops to 50 units

 

3.How many times per year would Item X be ordered?

a. 21x

b. 50x

c. 40x

d. None of the above

 

4.What is Item X's average inventory level?

a. 40 units

b. 48 units

c. 223 units

d. None of the above

 

5.How much would be Item X's total annual purchasing cost?

a. Php 8,485

b. Php 16,971

c. Php 2,000,000

d. None of the above

 

6.How much would be Item X's total annual procurement cost?

a. Php 8,485

b. Php 16,971

c. Php 2,000,000

d. None of the above

 

7.How much would be Item X's total annual storage cost?

a. Php 8,485

b. Php 16,971

c. Php 2,000,000

d. None of the above

 

8.How much would be Item X's total annual stockout cost? 

a. Zero

b. Php 8,485

c. Php 16,971

d. None of the above

 

9.Including its total annual purchasing cost, how much would be Item X's total annual inventory cost?

a. Php 2,008,485

b. Php 2,000,000

c. Php 2,016,971

d. None of the above

Answer 1

1. A
2. D
3. 3
4. A
5. C
6. A your answer is close:

Ordering Cost=(DQ)S

1. =(2,00094.3)(400)≈21.2×400≈Php 8,480
2. A your answer is close:

The total annual storage cost is the annual holding cost at EOQ.

1. Holding cost per unit per year: H=0.18×1,000=180 Php
2. EOQ: Q≈94.3 units

Annual storage (holding) cost=(Q2)H=(94.32)(180)≈47.15×180≈Php 8,487

1. Answer: Item X’s total annual storage cost is about Php 8,487.
2. A
3. D

Total annual inventory cost = purchasing cost + ordering cost + storage (holding) cost.

1. Annual purchasing cost: 2,000×1,000=Php 2,000,000
2. Annual ordering cost: ≈ Php 8,480
3. Annual storage (holding) cost: ≈ Php 8,487

Total annual inventory cost=2,000,000+8,480+8,487≈Php 2,016,967

1. Answer: Item X’s total annual inventory cost is about Php 2,016,967.