1. Classify the following inventory items as A, B, or C based on
annual dollar value (ADV):
Item
Annual
Demand
Unit
Annual
Cost $ Dollar
Value
(ADV)
1
3,000
10
30,000
2
9,000
3
27,000
3
1,000
710
710,000
4
2,500
250
625,000
5
1,900
500
950,000
6
400
200
80,000
7
500
100
50,000
8
1,000
4,300
4,300,000
9
200
210
42,000
10
5,000
720
3,600,000
11
2,500
192
480,000
12
1,000
35
35,000
TOTAL
From: OPERATIONS MANAGEMENT
Stevenson W; Hojati M; Cao J. 2015
McGraw-Hill Ryerson
Annual Dollar
Value (ADV) in
order
% of usage
Cumulative %
Class
2. a) Perform ABC classification on these items:
Item
1
2
3
4
5
6
7
8
9
10
Unit Cost
100
80
15
50
11
60
10
5
3
10
Annual Volume
170
30
60
7
70
90
60
25
10
40
b) Find the EOQ given this information: D=4,500 units/year S= 36 and H= 10 per unit per year.
3. The manager of an automobile repair shop hopes to achieve a better allocation of inventory
control efforts by adopting ABC classification. Given the monthly usages and unit costs in the
following table, classify the items into A,B and C categories according to monthly dollar value.
Item
4021
9402
4066
6500
9280
4050
6850
3010
4400
2307
Monthly Usage
50
300
40
150
10
80
2,000
400
7,000
1,958
Unit cost
1,400
12
700
20
1,020
140
15
20
25
14
4. The following table contains the monthly usage and unit costs for a random sample of 15
items from a list of 2,000 inventory items at a health care facility.
a) Develop an ABC Classification for these items.
b) How could the manager use this information?
c) After reviewing your classification scheme suppose that the manager decides to place item
PO5 into the A category. What are some possible explanations for this decision?
From: OPERATIONS MANAGEMENT
Stevenson W; Hojati M; Cao J. 2015
McGraw-Hill Ryerson
Item
K34
K35
K36
M10
M20
Z45
F14
F95
F99
D45
D48
D52
D57
N08
P05
Unit Cost
10
25
36
16
20
80
20
30
20
10
12
15
40
30
16
Monthly Usage
200
600
150
25
80
700
300
800
60
550
90
110
120
40
500
5. A large bakery buys flour in 25kg bags. The bakery uses an average of 4,860 bags a year.
Preparing an order, receiving the shipment, and paying the invoice costs $10 per order. Annual
holding cost is $5 per flour bag.
a) Determine the economic order quantity (EOQ).
b) How many orders per year will there be if EOQ is used?
c) Calculate the total annual cost of ordering and holding flour based on EOQ.
d) If ordering cost were to increase by 50 percent per order, by what percentage would the
EOQ change?
6. A large law firm uses an average of 10 packages of copier paper a day. Each package contains
500 sheets. The firm operates 260 days a year. Holding cost for the paper is $1 per year per
package, and ordering cost is $10 per order.
a. What order quantity would minimize total annual ordering and holding cost?
b. Calculate the total annual inventory control cost using your order quantity from part a.
c. Except for rounding, are annual ordering and holding costs equal at the EOQ?
d. The office manager is currently using an order quantity of 100 packages. The partners of the
firm expect the office to be managed is a cost-efficient manner. Would you recommend that
the office manager use the optimal order quantity instead of 100 packages? Justify your
answer.
From: OPERATIONS MANAGEMENT
Stevenson W; Hojati M; Cao J. 2015
McGraw-Hill Ryerson
7. A flower shop uses 250 clay pots a month. The pots are purchased for $2 each. Annual
holding cost is estimated to be 30 percent of purchase cost, and ordering cost is $20 per order.
The manager has been using an order quantity of 250 flower pots.
a. Calculate the EOQ
b. Calculate the EOQ’s total annual inventory cost.
c. What additional annual inventory cost is the shop incurring by using the current order
quantity?
8. A fresh produce distributor uses 800 nonreturnable packing crates a month, which it
purchases at a cost of $5 each. The manager has assigned an annual holding cost of 25 percent
of the purchase price per crate. Ordering cost is $28 per order. Currently the manager orders
800 crates at a time. How much could the firm save annually in ordering and holding cost by
using the EOQ?
From: OPERATIONS MANAGEMENT
Stevenson W; Hojati M; Cao J. 2015
McGraw-Hill Ryerson