Question-1 (40 pts)
InstaCam sells 1200 cameras per year, and the demand pattern throughout the year is very steady. The store orders its cameras from a regional supplier at a cost of $250 each. Each time an order is placed, an ordering cost of $125 is incurred. Holding costs are about 8.33% of the cost of the item annually. Currently, InstaCam orders cameras every quarter – i.e, in quantities of 300 units.
- For the current ordering policy (10 pts)
- What is the average inventory held? (2 pts)
- What is the number of orders placed annually? (4 pts)
- What is the total annual cost of holding and ordering? (4 pts)
- What is the economic ordering quantity – that minimizes the sum of holding and ordering costs? (5 pts)
- For the EOQ (12 pts)
- What is the average inventory held? (2 pts)
- What is the number of orders placed annually? (4 pts)
- What is the number of days between orders? Assume InstaCam works 300 days a year. (2 pts)
- What is the total annual cost of holding and ordering? (2 pts)
- How much does InstaCam save by switching from the current order quantity to the EOQ? (2 pts)
- Suppose the supplier has a lead time of 5 days. What reorder level should InstaCam use? (3 pts)
- If InstaCam places an order of at least 150 cameras each time it orders, the supplier will reduce the price of each camera by $5. Should InstaCam use an order quantity of 150 units in order to get this discount? Calculate all costs and savings and make a recommendation. (10 pts)
Question-2 (30 pts)
HappyNY is an Internet order business that sells one popular New Year greeting card once a year. The cost of the paper on which the card is printed is $0.05 per card, and the cost of printing is $0.15 per card. The company receives $2.15 per card sold. Since the cards have the current year printed on them, unsold cards have no salvage value. Its customers are from all over the country; demand is normally distributed with mean 8,000 and standard deviation 1500.
(Each question below is worth 5 points.)
- What is the cost of an unsold greeting card?
- What is the cost of a “shortage”, i.e., not having a card when there is demand for it?
- What is the critical fractile for HappyNY? What does this mean?
- What is the optimal order quantity for the New Year greeting card?
- If HappyNY uses the quantity in (d), what is the risk it is taking of a shortage?
- A market research survey is able to reduce the standard deviation of demand to 1000 cards. What is the effect of this on the optimal order quantity?
Question-3 (30 pts)
The number of laptops sold each week by large electronics discount store is normally distributed with a mean of 50 units and a standard deviation of 10 units. The holding cost of a laptop is about $85 per year. Ordering costs are $100 per order. The Taiwanese supplier of the laptops provides a lead time of 2 weeks. Assume that the store is open all year round.
(Each question below is worth 5 points)
- What is the economic order quantity (EOQ) for this laptop?
- What is the total annual holding plus ordering cost for this laptop?
- The VP of Marketing has specified a 99% service level for these laptops. What should the reorder point (ROP) be to achieve this service level?
- What is the safety stock needed to attain the 99% service level?
- If management decides that a 95% service level is acceptable, what are the new ROP and the new safety stock?
- Because of a strike supplier lead time increases to 4 weeks for the foreseeable future. What are the new ROP and the new safety stock for a 99% service level?
Instructions
- You may show your work in Excel or Word. In either case all steps and formulas must be shown.
- Answer each problem on a separate page.
- Indicate which question (or sub-question) you are answering.
- Clearly highlight the answer.
