1.
The purchase price of an inventory item is $25 per unit. In each three month period the usage of the item is 20,000 units.
The annual holding costs associated with one unit equate to 6% of its purchase price. The cost of placing an order for the item is $20.
What is the economic order quanity for the inventory item to the nearest whole unit?
Correct Answer
C. 1,461
Explanation
{[ 2 x 20 x (4 x 20,000)] / [0.06 x 25]}^0.5 = 1,461 units
2.
A company always determines its order quantity for a raw material by using the EOQ model.
What would be the effects on the EOQ and the total annual holding cost of a decrease in the cost of ordering a batch of raw material?
Correct Answer
D. EOQ: Lower, Annual Holding Cost: Lower
Explanation
When the cost of ordering a batch of raw material decreases, it becomes more cost-effective for the company to place smaller and more frequent orders. This leads to a decrease in the EOQ (Economic Order Quantity), which is the optimal order quantity that minimizes the total cost of ordering and holding inventory. With a lower EOQ, the company can reduce its inventory holding costs, as it needs to hold less inventory for a shorter period of time. Therefore, the total annual holding cost also decreases.
3.
Sky Limited wishes to minimise its inventory costs. At the moment its reorder quantity is 1,000 units. Order costs are $10 per order and holding costs are $0.10 per unit per month. Sky limited estimates annual demand to be 15,000 units.
What is the optimal reorder quantity (to the nearest 100 units)?
Correct Answer
A. 500 units
Explanation
{[ 2 x 10 x (15,000 / 12)] / 0.10]}^0.5 = 500 units
4.
A company uses 9,000 units per annum. The component has a purchase price of $40 per unit and the cost of placing an order is $160. The annual holding cost of one component is equal to 8% of its purchase price.
What is the EOQ (to the nearest unit) of the component?
Correct Answer
C. 949
Explanation
The EOQ (Economic Order Quantity) is a formula used to determine the optimal order quantity that minimizes total inventory costs. In this case, the annual demand is 9,000 units, the purchase price is $40 per unit, the cost of placing an order is $160, and the annual holding cost is 8% of the purchase price. By plugging these values into the EOQ formula, we can calculate the EOQ to be 949 units. This means that ordering 949 units at a time will minimize the total inventory costs for the company.
5.
A company determines its order for a component using EOQ.
What would be the effects on the EOQ and the total annual ordering cost of an increase in the annual cost of holding one unit of the component in inventory?
Correct Answer
A. EOQ: Lower, Total Annual Ordering Cost: Higher
Explanation
An increase in the holding cost of inventory means that the EOQ will become smaller (since the holding cost is below the line in the EOQ formula). A smaller EOQ means more orders on average each year; therefore annual ordering costs will increase.
6.
The demand for a product is 12,500 units for a three month period. Each unit of product has a purchase price of $15 and ordering costs are $20 per order placed.
The annual holding cost of one unit of product is 10% of its purchase price.
What is the EOQ (to the nearest unit)?
Correct Answer
D. 1,155
Explanation
The Economic Order Quantity (EOQ) is a formula used to determine the optimal order quantity that minimizes both ordering costs and holding costs. In this case, the demand for the product is given as 12,500 units for a three month period. The purchase price of each unit is $15 and the ordering costs are $20 per order placed. The annual holding cost of one unit is 10% of its purchase price. To calculate the EOQ, we can use the formula: EOQ = √((2 * demand * ordering cost) / holding cost). Plugging in the given values, we get EOQ = √((2 * 12,500 * 20) / (15 * 0.10)) = √(500,000 / 1.50) = √333,333.33 ≈ 1,155. Therefore, the EOQ to the nearest unit is 1,155.
7.
The demand for an item of material is 8,000 units each year. The cost of making an order is $240. The purchase cost per unit is $9 and the holding cost of inventory is 6% per annum of the purchase cost.
Using the economic order quantity formula, what quantity of the item should be purchased in each order (to the nearest unit)?
Correct Answer
D. 2,667
Explanation
{[ 2 x 240 x 8,000] / 0.54]}^0.5 = 2,667 units
8.
A company uses the EOQ formula to decide the purchase quantity for materials. The purchase cost of item 1234 is $25 per unit. Annual demand is 10,000 units. The annual holding cost is $2.50 per unit and ordering costs are $500 per order. The supplier is offering a reduction in the purchase price to $23 per unit on all orders of 5,000 units or more.
Which one of the following statements is correct?
Correct Answer
C. The company will minimise its total annual costs if it takes the larger order discount and purchases in quantities of 5,000 units per order.
Explanation
EOQ = {[ 2 x 500 x 10,000] / 2.5]}^0.5 = 2,000 units
Costs will be minimised by purchasing either 2,000 units (the EOQ) or the minimum quantity required to obtain the large order discount (5,000 units).
Order Size 2,000 Order Size 5,000
Purchase Costs (10,000 units) 250,000 230,000
Holding Costs (at $2.50) 2,500 6,250
Ordering Costs ($500 per order) 2,500 1,000
Total Costs 255,000 237,250
9.
A company manufactures Product Z in batches. Output capavity is 1,000 units of Product Z per week but demand is only 200 units per week. There are 50 weeks in each year. The annual cost of holding finished units of Product Z in store is $2 per unit per year. Set-up costs for a batch of Product Z are $800 per batch.
What batch production quantity for Product Z will minimise total annual costs, to the nearest 100 units?
Correct Answer
C. 3,200 units
Explanation
{[ 2 x 800 x (200 x 50)] / [2 x (1 - (200 / 1,000))}^0.5 = 3,162 units or 3,200 units to the nearest 100 units.
10.
A production department uses Component P to manufacture a product. This component is purchased from an external supplier in quantities of 3,000 units per order. Daily usage is 150 units of the component each day. The supply lead time is normally 6 days, but might be as little as 4 days or as much as 10 days.
To avoid the risk of running out of inventory of Component P, what should be the reorder level for this item?
Correct Answer
B. 1,500 units
Explanation
Reorder Level = Demand per day x Maximum Supply Lead Time = 150 units x 10 days = 1,500 units