The H.A.L. Computer Store sells a printer for $250. Demand for this is constant during the year, and monthly demand is forecasted to be 60 units. The holding cost is $15 per unit per year, while the cost of ordering is $40 per order. Currently, the company is ordering 12 times per year (55 units each time). There are 250 working days per year and the lead-time is 8 days.


a.) Given the current policy of ordering 55 units at a time, what is the total of the annual
ordering cost and the annual holding cost?

b.) If the company used the absolute best inventory policy, what would the total of the ordering
and holding cost be?


Thaarugo Inc produces a GPS device that is becoming popular in parts of Scandinavia. When Thaarugo produces one of these, a printed circuit board (PCB) is used and it is populated with several electronic components. Thaarugo determines that it need about 15,500 of this type of PCB each year. Demand is relatively constant throughout the year and the ordering cost is about $35/ order; the holding cost is 25% of the price of each PCB. Two companies are competing to become the dominant supplier of PCB, and both have offered quantity discounts as shown in the following table.


Which of the two suppliers should be selected if Thaarugo wishes to minimize total annual inventory costs? Explain.

Supplier A- Quantity

Supplier A Price

Supplier B- Quantity

Supplier B Price









500 or more


1000 or more



Estar Appliance is a company that produces all kinds of major appliances. The presidents of Estar is concerned about the production policy for the company’s best-selling refrigerator. The annual demand has been about 10,000 units each year. 220 units can be produced each day. Each time production starts, it costs the company $130 to move materials into place, reset the assembly line, and clean the equipment. The cost of holding a refrigerator is $40 per year. The current production plan calls for 450 refrigerators to be produced in each production run. (Hint: Remember for Production Lot problems, our Q represents the amount produced during a production run, ie Q=450). Assume there are 250 working days per year.

a. What is the daily demand for the product?

b. Under the current policy (ie 450 refrigerators being produced in a production run), how many production runs would be required per year?

c. If the current policy continues, how many refrigerators would be in inventory when production stops (ie the max inventory level)? What would the average inventory level be?

d. Under the current policy, what is your Total Annual cost?

e. If the president of the company wants to minimize the total annual inventory cost, how many refrigerators should be produced in a production run? How much would this approach save the company as compared with its current policy?

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