Adi Ben-Israel Operations Management Nov 10, 99
22:711:578:61 Midterm Exam: Part 2 7:30-9:00 pm
Last Name: First Name: ID No.
? The exam has three problems of equal weights. Do any two.
? This exam is open books & open notes.
? Use of calculators, laptops and brain is allowed.
1. A firm knows that the price of the product it is ordering is going to increase permanently
by X dollars. Annual demand is D units, and the unit annual holding cost is h dollars. There
is a fixed set-up cost of K dollars per order.
The company considers placing a special order of size Q before the price increase goes into
effect. What is the optimal Q?
Here is one approach to this problem:
(a) What extra costs (holding and set-up) are incurred by ordering Q units now? (b) How much in purchasing costs is saved by ordering Q units now? (c) What value of Q maximizes the difference:
purchasing cost savings - extra costs ? (d) Suppose the annual demand is 1200 units, the holding cost per unit is $10, and the price
of an item is going to increase by 15$. Set-up cost is 50$ per order. How large an special
order should the firm place before the price increase goes into effect?
2. A hospital needs to order drugs that are used to treat heart attack victims. Annually 800
units are used, purchased at $300 per unit, plus a $600 fixed charge per order. It costs $20
to store each unit for one year and the annual cost of capital is 15%. Assume no shortage is
allowed and deterministic demand.
(a) Calculate the EOQ, the annual fixed ordering cost, holding cost and total affected cost.
(b) The FDA has ruled that the drug should not be stored for more than 30 days (assume 365
days/year). Calculate the optimal order size and the fixed, holding and total annual costs.
(c) A competing supplier is offering a compatible drug which can be stored for 60 days. The
fixed charge per order, however, is $650, while purchase, storage and capital costs are
unchanged. Should the hospital switch to the competing supplier? What is the annual
saving/loss due to such a switch?
3. Each year Garden State Auto Parts (GSAP) sells 10,000 batteries. The company wants to determine how many batteries should be ordered each time. It costs $50 to process each
order, and the cost of carrying a battery in inventory for one year is 10% of the purchase
price. The batteries supplier offers GSAP quantity discounts as follows
Order quantity Price per unit
Determine the optimal policy, and compute the relevant costs.