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444 CHAPTER 10 INVENTORY MODELS

a. What is the EOQ for this component?
b. What is the reorder point?
c. What is the cycle time?
d. What are the total annual holding and ordering costs associated with your
recommended EOQ?
5 Suppose that Suyuti’s management in Problem 4 likes the operational efficiency of
ordering once each month and in quantities of 1000 units. How much more expensive
would this policy be than your EOQ recommendation? Would you recommend in favour of
the 1000-unit order quantity? Explain. What would the reorder point be if the 1000-unit
quantity were acceptable?
6 Assume that a production line operates such that the production lot size model of Section
10.3 is applicable. Given D ¼ 6400 units per year, C o ¼ E100 and C h ¼ E2 per unit per
year, compute the minimum cost production lot size for each of the following production
rates:
a. 8 000 units per year.
b. 10 000 units per year.
c. 32 000 units per year.
d. 100 000 units per year.

Compute the EOQ recommended lot size using Equation (10.5). What two observations
can you make about the relationship between the EOQ model and the production lot size
model?

7 Groebler Publishing Company produces books for the retail market. Demand for a current
book is expected to occur at a constant annual rate of 7200 copies. The cost of one copy of
the book is E14.50. The holding cost is based on an 18 per cent annual rate and
production setup costs are E150 per setup. The equipment on which the book is produced
has an annual production volume of 25 000 copies. Groebler has 250 working days per
year, and the lead time for a production run is 15 days. Use the production lot size model to
compute the following values:
a. Minimum cost production lot size.
b. Number of production runs per year.
c. Cycle time.
d. Length of a production run.
e. Maximum inventory.
f. Total annual cost.
g. Reorder point.

8 A well-known manufacturer of several brands of toothpaste uses the production lot size
model to determine production quantities for its various products. The product known as
Extra White is currently being produced in production lot sizes of 5000 units. The length of
the production run for this quantity is ten days. Because of a recent shortage of a particular
raw material, the supplier of the material announced that a cost increase will be passed
along to the manufacturer of Extra White. Current estimates are that the new raw material
cost will increase the manufacturing cost of the toothpaste products by 23 per cent per
unit. What will be the effect of this price increase on the production lot sizes for Extra
White?
9 Suppose that Suyuti Auto of Problem 4, with D ¼ 12 000 units per year,
C h ¼ (2.50)(0.20) ¼ E0.50 and C o ¼ E25, decided to operate with a backorder inventory
policy. Backorder costs are estimated to be E5 per unit per year. Identify the following:

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