MGT 3110: Exam 2 Study Guide

1. A company has 12 items in its inventory. Using the data given below classify the items into A, B,
and C classes.

SKU Annual usage (units) Unit $ value

D120 6850 1.20
E111 371 8.60
C140 1292 13.18
E151 62 91.80
B180 12667 3.20
B120 9625 10.18
E149 7010 1.27
A180 5100 0.88
E110 258 62.25
A155 862 18.10
F120 1940 0.38
B150 967 2.20

2. Herbert Adams sells bicycles. One particular model is highly popular with annual sales of 2,000
units per year. Annual holding cost is $200 per unit and the ordering cost is $40. The store is open
250 days a year.
a. What is the economic order quantity?
b. What is the average number of orders per year?
c. What is the average time between orders in days?
d. What is the annual total cost?

3. Montegut Manufacturing produces a product for which the annual demand is 10,000. Production
averages 100 per day, while demand is 40 per day. Holding costs are $1.50 per unit per year; set-
up costs $200.00. If they wish to produce this product in economic batches, what size batch
should be used? What is the length of time in days to producing one lot? What is the maximum
inventory level? What is the time between orders in days? How many order cycles are there per
year? Determine the total annual inventory cost?

4. The annual demand, ordering cost, and the inventory carrying cost rate for a certain item are D =
600 units, S = $10/order and holding cost is 30% of item price. Price is established by the following
quantity discount schedule. What should the order quantity be in order to minimize the total
annual cost?

Quantity 1 to 49 50 to 249 250 and up

Unit price $5.00 $4.50 $4.10

5. A warehouse store sells laser printer cartridges in bulk. The company places restocking orders
1000 boxes at a time. The annual demand is 8000 boxes. The demand during lead time is given
below. The average demand during lead time is 60 boxes. Assume holding cost of $50 per box per
year and a stock out cost of $40 per box.
 Demand during lead time Probability
40 0.1
50 0.2
60 0.2
70 0.2
80 0.2
90 0.1
Determine the least cost safety stock and the corresponding ROP.

6. The Winfield Distributing Company has maintained an 80% service level policy for inventory of
string trimmers. Mean demand during the reorder period is 130 trimmers, and the standard
deviation is 80 trimmers. What is the value of ROP and SS?

7. The new office supply discounter, Paper Clips, Etc. (PCE), sells a certain type of ergonomically
correct office chair which costs $300. The annual holding cost rate is 40%, annual demand is 600,
and the order cost is $20 per order. The store is open 300 days per year and PCE has decided to
establish a customer service level of 90%.
a. Suppose that the lead time is a constant 4 days and the demand is variable with a standard
deviation of 2.4 chairs per day. What is the safety stock and reorder point?
b. Suppose that the lead time is a variable with an average of 4 days and standard deviation of
3 days. Further suppose that the demand is constant. What is the safety stock and reorder
point?
c. Suppose that the lead time is a variable with an average of 4 days and standard deviation of
3 days. Further suppose that the demand is also variable with a standard deviation of 2.4
chairs per day. What is the safety stock and reorder point?

8. An oyster bar buys fresh oysters for $3 per pound and sells them for $10 per pound. Unsold
oyster at the end of the day is sold to a grocery store for $1.20 per pound. Determine the
pounds of oysters that must be ordered each day if the daily demand follows normal distribution
with mean of 150 pounds and standard deviation of 12 pounds.

9. Leisure Travels, Inc. manufactures and sells Recreation Vehicles. The demand for the next four
quarters is forecasted as 160, 180, 220, and 200. The labor required to produce one unit is 100
hours. Each worker works 8 hours per day for 65 days per quarter. Regular wages is $15 per hour
and O.T. wages is $20 per hour. O.T. is limited to 20% regular hours. Limited subcontracting is
available at the rate of $2500 per unit. Holding cost per unit per quarter is $100. Cost of hiring a
worker is $350 and firing worker will cost $500. The company currently has 30 employees.
a. Determine the production rate per worker per day and per quarter.
b. Determine the regular time wage per worker per day and per quarter.
c. Determine the O.T. cost per unit.
d. Develop a “Chase” plan and the corresponding cost summary. Round up workers needed.
e. Develop a “Level” plan and the corresponding cost summary.
f. Develop a “Mixed” plan with a constant work force of 31 workers, but produce only what the
net demand is each month, i.e. not accumulate any inventory in excess of the safety stock. If
 regular time capacity is not sufficient, use O.T. production first and use subcontracting only of
O.T. capacity is not enough to make up the shortage. Round to 2 decimal places.

10. Consider the following Solver model for an aggregate planning problem given in the next page.
a. What is the Solver Target cell?
b. What are the Solver changing cells?
c. What are the Solver constraints?
d. What options of Solver must be checked?

e. Determine the excel formula for the following cells:

B17 F29
B18 G29
B19 H29
 B22 G33
E22 B35
B23 B36
C26 B37
D26 B38
E26 B39
B29 B40
C29 B41

11. A concert organizing company wishes to study the effect of discount pricing on net revenue
generated. Currently the company charges uniform fee of $100 per ticket and has averaged 500
tickets sold. The company is considering a three tier pricing structure, (a) a deeply discounted $70
per ticket if purchased at least 1 month in advance, (b) $90 per ticket if purchase at least a week in
advance and $120 at the box office on the day of the event. The company has estimated a
demand of 300 tickets sold at least a month in advance, 200 at least a week in advance and 100 on
the day of the event. The company estimates the variable cost to be $3 per ticket under all the
three prices. Using the yield revenue approach determine what the effect of the proposed price
structure will be on net revenue.

12. A Bill of Materials is desired for a bracket (A) that is made up of a base (B), two springs (C) and four
clamps (D). The base is assembled from one clamp (D) and two housings (E). Each clamp has one
handle (F) and one casting (G). Each housing has two bearings (H) and one shaft (I).
a. Develop a product structure tree.
b. The lead time for the parts are given below. Develop a time-phased product structure.
c. The available inventory for each part is given in the table below. Determine the net
requirement quantities of all parts required to assemble 50 units of bracket A.

Item Lead time Available

A 1 5
B 2 5
C 3 10
D 2 20
E 1 50
F 2 150
G 1 50
H 1 5
I 2 0

13. A product (A) consists of a base (B) and a casting (C). The base consists of a plate (P) and three
fasteners (F). The lead time, current on-hand inventory and scheduled receipts are given below.
All components are lot for lot. The MPS requires start of production of 100 units of product A in
week 4 and 150 in week 6. Produce the MRP for the upcoming six weeks. Produce a list of all
planned order releases.
 Part Lead time On-hand Scheduled receipts
B 1 100 50 in week 1
C 3 30 20 in week 1, 30 in week 2
P 2 0 50 in week 1
F 4 0 30 in week 1, 40 in week 3

14. For the following item the inventory holding cost is $0.80 per week and the setup cost is $300.
Determine the lot sizes and total cost for this item under (i) Lot-for-Lot, (ii) EOQ, and (iii) POQ
methods.

Item   LT = 1            
Week: 1 2 3 4 5 6 7 8
Gross requirement 100 250 200 150 250 200 200 150
Scheduled receipts                
Projected on-hand 100
Net Requirement
Planned receipts
Planned order releases

15. Consider the following planned and actual hours of input and output.

Week ending 1 2 3 4 5 6
Planned input 500 800 700 600 600 800
Actual input 700 700 700 800 600 500
Planned output 650 650 650 650 650 700
Actual output 600 700 800 700 650 500

Prepare the Input/Output Control chart for this workstation. Assume an initial actual backlog of
120 hours and zero for the two cumulative deviations.

16. The following jobs are waiting to be processed on day 50

Job Production days needed Date job due
A 30 90
B 20 215
C 40 175
D 35 180
Sequence the jobs in the order of SPT, EDD, and Critical Ratio, and compute (i) Average flow time,
(ii) Average lateness, (iii) Average number of jobs in the system, and (iv) Utilization, for each of the
three schedule of jobs.

17. An antique restoration operation uses a two-step sequence that all jobs in a certain category
follow. For the group of jobs listed.
a. Find the sequence that will minimize total completion time.
b. Determine the amount of idle time for workstation 102.
c. What jobs are candidates for splitting‘? Why? If they were split, how much would idle time
and makespan time be reduced? Assume the very first job can be split 50% and the remaining
jobs can be spit 60%.

JOB TIMES (minutes)

  A B C D E
Workstation 101 27 18 70 26 15
Workstation 102 45 33 30 24 10
Answers

1.

Annual
usage Annual Dollar Cum. % Cum. % for
No. SKU (units) Unit $ value volume Dollar % for $ no. of items Class
1 B120 9625 10.18 97,982.50 44.4% 44.4% 8.3% A
2 B180 12667 3.20 40,534.40 18.4% 62.8% 16.7% A
3 C140 1292 13.18 17,028.56 7.7% 70.5% 25.0% B
4 E110 258 62.25 16,060.50 7.3% 77.8% 33.3% B
5 A155 862 18.10 15,602.20 7.1% 84.9% 41.7% B
6 E149 7010 1.27 8,902.70 4.0% 88.9% 50.0% B
7 D120 6850 1.20 8,220.00 3.7% 92.6% 58.3% C
8 E151 62 91.80 5,691.60 2.6% 95.2% 66.7% C
9 A180 5100 0.88 4,488.00 2.0% 97.3% 75.0% C
10 E111 371 8.60 3,190.60 1.4% 98.7% 83.3% C
11 B150 967 2.20 2,127.40 1.0% 99.7% 91.7% C
12 F120 1940 0.38 737.20 0.3% 100.0% 100.0% C
220565.66 100%

2. D = 2000, No. of days = 250, H = $200, S = $40

2(2000 )40
a.

b.
EOQ =
√ 200
N = D/Q = 2000/28 = 71.4
=28

c. d = D/No. of days per year = 2000/250 = 8, T = Q/d = 28/8 = 3.5 days

d. Annual total cost = (D/Q)S + (Q/2)H = (2000/28)40 + (28/2)200 = $5,657

3. D = 10,000, H = $1.50, S = $200, p = 100/day, d = 40/day

2 DS 2 (10000 ) 200
EPQ =
√ d
H (1− )
p
=

√
1.50(1−
40 = 2108
100
)

Production time = Q/p = 2108/100 = 21.08 days

Imax = (Q/p)(p - d) = (2108/100)(100 - 40) = 1264.80

Average number of orders per year = D/Q = 10000/2108 = 4.74

Time between orders = Q/d = 2108/40 = 52.7 days

Annual holding cost = (Imax/2) x H = (1264.80/2) x 1.50 = $948.60

Annual setup cost = (D/Q) x S = (10000/2108) x 200 = $948

Total cost = 948.60 + 948 = $1,896.60

4.

D = 600 S = 10 Holding cost = 30%

Q Price Holding cost Formula Q   Candidate Q

Formula Q > upper limit --
1 - 49 5.00 1.50 89 not a candidate -
Formula Q is within range, =
50 - 249 4.50 1.35 94 Candidate Q = Formula Q 94
250 & Formula Q < lower limit,
above 4.10 1.23 99 Candidate Q = lower limit  250

Q Price Candidate Q Ordering cost Holding cost Item cost Total cost
1 – 49 5.00 -
50 - 249 4.50 94 63.83 63.45 2700 2827.28
>= 250 4.10 250 24.00 153.75 2460 2637.75
EOQ = 250 @ P = $4.10        

5. Number of orders per year = 8000/1000 = 8, H = $50, C s = $40

Safety
ROP stock Carrying cost Expected stock out Stock out cost/year Total cost
60 0 0 (10x.2 + 20x.2 + 30x.1) = 9 9 x 8 x 40 = $2,880 $2,880
70 10 10 x $50 = $500 (10x.2 + 20x.1) = 4 4 x 8 x 40 = $1,280 $1,780
80 20 20 x $50 = $1000 (10x.1) = 1 1 x 8 x 40 = $320 $1320
90 30 30 x $50 = $1500 0 $0 $1500

Least cost safety stock = 20, ROP = 80

6. Given dL = 130, dLT = 80, and for 80% service level, Z = 0.84
ROP = 130 + 0.84 x 80 = 197.2, or round up to 198 for at least 80% service level

7. d = D/No. of days per year = 600/300 = 2 per day, Z for 90% service level = 1.285

a. Given: L = 4 days Constant, d = 2.4 per day, therefore dLT = 2.4 √ 4 = 4.8
Safety stock = Z dLT = 1.285 x 4.8 = 6.2 or 7 (round up for at least 90% service level)
ROP = dL + SS = (2 chairs/day * 4) + 7 = 15

b. Given: L = 4 days with L = 3 and demand is constant, dLT = 2 (3) = 6

 Safety stock = Z dLT = 1.285 x 6 = 7.7 or 8 (round up for at least 90% service level)
ROP = dL + SS = (2 chairs/day * 4) + 8 = 16

c. Given: L = 4 days with L = 3 , and d = 2.4 per day,

therefore dLT = 4 (2.4)2 +22 3 2 = 7.684
√
Safety stock = Z dLT = 1.285 x 7.684 = 9.9 or 10 (round up for at least 90% service level)
ROP = dL + SS = (2 chairs/day * 4) + 10 = 18

8. Cs = Lost profit = Selling price per unit – Cost per unit = 10 – 3 = $7

Co = Cost/unit – salvage value/unit = 3 – 1.20 = $1.80
Optimum service level = 7/(7 + 1.80) = 0.795 = 79.5%

From normal table, for 79.5% service level, Z = 0.83

Stock =  + Z  = 150 + 0.825 (12) = 159.9 or 160

9.
Hiring cost/worker = 350 Worker hours/quarter = 520
Firing cost/worker = 500 Standard hours/unit = 100
RT Wage/hour = 15 Holding cost = 100
OT wage rate/hour = 20
Sub-contracting cost/unit = 2500
a. Production rate/worker/day = 8 hours per day/100 hours per unit = 0.08 per worker/day
Production rate/worker/quarter = 0.08/worker/day x 65 days/quarter = 5.2/worker/ quarter
b. Wage rate per worker per day = $15/hour x 8 hours/day = $120
Wage rate per worker per quarter = $15/hour x 8 hours/day x 65 days/quarter = $7800
c. OT cost/unit = $20/hour x 100 hours/unit = $2000

d. Chase plan
Production Hired
required Workers Workers needed worker Fired
Period Demand needed (Rounded) s workers
30
160–(0–0) =
1 160 160 160/5.2=30.77 31 1 0
2 180 180 180/5.2=34.62 35 4 0
3 220 220 220/5.2=42.31 43 8 0
4 200 200 200/5.2=38.46 39 0 4
148 13 4

Cost summary  
Regular wages 148 workers-quarters x $7800 = 1,154,400
O.T. cost =
S.C. cost
Hiring cost 13 workers x $350 = 4,550
Firing cost 4 workers x $500 = 2,000
Carrying cost  
Total cost $1,160,950
e. Level Plan
Sum of demand = 760
Average demand = 760/4 = 190 i.e. = production per quarter

Period Demand RT Production E.I.

      0
1 160 190 30
2 180 190 40
3 220 190 10
4 200 190 0

No. of workers needed = 190/5.2 = 36.54 or 37

Cost summary  
Regular wages 37 workers x 4 quarters x $7800 = 1,154,400
Hiring cost (37 workers – 30 workers) x $ 350 = 2,450
Firing cost -
Carrying cost 80 x $100 = 8,000
Total cost $1,164,850

f. Mixed Plan
No. of workers = 31
Production per quarter with 31 workers = 31 x 5.2 = 161.2
O.T. capacity/quarter = 161.2 x 20% = 32.2

Period Demand Production capacity RT Production

1 160 161.2 Min(160,161.2) =160
2 180 161.2 Min(180,161.2) =161.2
3 220 161.2 Min(220,161.2) =161.2
4 200 161.2 Min(200,161.2) =161.2
643.6

Shortage O.T Capacity O.T. Production S.C.

160 – 160=0 32.2 0 0
180-161.2=18.8 32.2 Min(18.8,32.2) = 18.8 0
220-161.2=58.8 32.2 Min(58.8,32.2)=32.2 58.8 – 32.2=26.8
200-161.2=38.8 32.2 Min(38.8,32.2)=32.2 38.8 - 32.2=6.8
82.8 33.6

Cost summary  
Regular wages 31 workers x 4 quarters x $7800 = 967,200
O.T. cost = 82.8 units x $2000 165,600
S.C. cost 33.6 units x $2500 = 84,000
Hiring cost (31 – 30) x $350 = 350
Firing cost -
 Carrying cost -
Total cost $1,217,150

10.

B17 (B13*B12)/B11 F29 E4 a. B41

B18 B13*B3*B12 G29 SUM(B29:E29)-F29 b. C22:D25, D29:E32
B19 B11*B4 H29 C29*$B$14 c. D29:D32 <= H29:H32
B22 E11 G33 SUM(G29:G32) G29:G32 >= E13
E22 B22+C22-D22 B35 E26*B18 C22:D25 = Integer (if needed)
D29:E32 = Integer (if needed)
B23 E22 B36 D33*B19
d. Changing cells non-negative
C26 SUM(C22:C25) B37 E33*B5
Simplex LP
D26 SUM(D22:D25) B38 C26*B7
E26 SUM(E22:E25) B39 D26*B8
B29 E12 B40 G33*B6
C29 E22*$B$17 B41 SUM(B35:B40)

11. Current pricing:

Price = $100
Demand = 500
Revenue = 500 x $100 = 50,000
Variable cost = $3 x 500 = 1500
Net revenue = 50,000 – 1,500 = $48,500

Proposed pricing:
Price 70 90 120
Demand 300 200 100
Revenue 21000 18000 12000

Total revenue = 51000

Variable cost = $3 x 600 tickets sold = 1800
Net revenue = 51,000 – 1,800 = $49,200

12. (a)

B C2

D1 E2 D4

F G H2 I F G
(b).
F
D
G

B
H
E
I
C A

F
D
G

1 2 3 4 5 6 7
Lead time = 7 weeks

(c)
Part Gross Available Net
A 50 5 50 – 5 = 45
B 1 x A = 45 5 45 – 5 = 40
C 2 x A = 2 x 45 = 90 10 90 – 10 = 80
D 4 x A + 1 x B = 4 x 45 + 40 = 220 20 220 – 20 = 200
E 2 x B = 80 50 80 – 50 = 30
F 1 x D = 200 150 200 – 150 = 50
G 1 x D = 200 50 200 – 50 = 150
H 2 x E = 2 x 30 = 60 5 60 – 5 = 55
I 1 x E = 30 0 30 – 0 = 30
13.
    1 2 3 4 5 6
MPS start for A         100   150

Item B GR =   Lead time = 1    

Week: 1 2 3 4 5 6
Gross requirement 0 0 0 100 0 150
Scheduled receipts 50          
Projected on-hand 100 100 150 150 150 50 50
Net requirement 100
Planned receipts 0 0 0 0 0 100
Planned order releases 0 0 0 0 100 0

Item C   Lead time = 3    

Week: 1 2 3 4 5 6
Gross requirement 0 0 0 100 0 150
Scheduled receipts 20 30        
Projected on-hand 30 30 50 80 80 0 0
Net requirement 20 150
Planned receipts 0 0 0 20 0 150
Planned order releases 20 0 150 0 0 0

Item P   Lead time = 2    

Week: 1 2 3 4 5 6
Gross requirement 0 0 0 0 100 0
Scheduled receipts 50          
Projected on-hand 0 0 50 50 50 50 0
Net requirement 50
Planned receipts 0 0 0 0 50 0
Planned order releases 0 0 50 0 0 0

Item F   Lead time = 4    

Week 1 2 3 4 5 6
Gross requirement 0 0 0 0 300 0
Scheduled receipts 30   40      
Projected on-hand 0 0 30 30 70 70 0
Net requirement 230
Planned receipts 0 0 0 0 230 0
Planned order releases 230 0 0 0 0 0

Planned order releases:

A has releases of 100 in week 4, 150 in week 7
B has a release of 100 in week 5
C has releases of 20 in week 1, 150 in week 3
P has a release of 50 in week 3
F has a release of 230 in week 1
14. (i) L-4-L
Item   LT = 1            
Week: 1 2 3 4 5 6 7 8
Gross requirement 100 250 200 150 250 200 200 150
Scheduled receipts                
Projected on-hand 100 100 0 0 0 0 0 0 0
Net Requirement 0 250 200 150 250 200 200 150
Planned receipts 0 250 200 150 250 200 200 150
Planned order releases 250 200 150 250 200 200 150 0

No. of setup = 7
Carrying cost = 0
Setup cost = 7 x $300 = 2100
Total cost = 2100

(ii) EOQ:
Total demand for 8 weeks = 1500, d = 1500/8 = 187.5
H = $0.80/week
S = 300
2 ( 187.5 ) 300 = 375

Item
Q=
√ 0.8
  LT = 1            
Week: 1 2 3 4 5 6 7 8
Gross requirement 100 250 200 150 250 200 200 150
Scheduled receipts 0 0 0 0 0 0 0 0
Projected on-hand 100 100 0 125 300 150 275 75 250
Net Requirement 0 250 75 0 100 0 125 0
Planned receipts 0 375 375 0 375 0 375 0
Planned order releases 375 375 0 375 0 375 0 0

Setup cost per week = (d/Q) S = (187.5/375) x 300 = 150

Holding cost per week = (Q/2)H per week = (375/2) x 0.80 = 150
Total cost per week= 150 + 150 = 300
Cost for 8 weeks = Total cost per week x 8 weeks = 300 x 8 = 2400

(iii) POQ
No. of periods = EOQ/d = 375/187.5 = 2 weeks
Item   LT = 1            
Week: 1 2 3 4 5 6 7 8
Gross requirement 100 250 200 150 250 200 200 150
Scheduled receipts 0 0 0 0 0 0 0 0
Projected on-hand 100 100 0 200 0 250 0 200 0
Net Requirement 0 250 0 150 0 200 0 150
Planned receipts 0 450 0 400 0 400 0 150
Planned order releases 450 400 400 150

No. of setup = 4
Setup cost = 4 x $300 = 1200
Sum of ending inventory 650
Carrying cost = 650 x 0.8 = 520
Total cost = 1720

#15.
Week ending   1 2 3 4 5 6
Planned input   500 800 700 600 600 800
Actual input   700 700 700 800 600 500
Cumulative deviation   200 100 100 300 300 0
Planned output   650 650 650 650 650 700
Actual output   600 700 800 700 650 500
Cumulative deviation   -50 0 150 200 200 0
Backlog 120 220 220 120 220 170 170

#16. SPT
Processing Days till due Completion time
Job time (Days) date (Flowtime) Lateness
B 20 165 20 0
A 30 40 50 10
D 35 130 85 0
C 40 125 125 0
125 280 10

Average flow time = 70

Average lateness = 2.5
Average WIP = 2.240
Utilization = 44.6%

EDD
Processing Days till due Completion time
Job time (Days) date (Flowtime) Lateness
A 30 40 30 0
C 40 125 70 0
D 35 130 105 0
B 20 165 125 0
125 330 0

Average flow time = 82.5

Average lateness = 0
Average no. of jobs in the system = 2.640
Utilization = 37.9%
CR
Job Processing time Date job due Due date CR
A 30 90 40 1.333333
B 20 215 165 8.25
C 40 175 125 3.125
D 35 180 130 3.714286

Processing Days till due Completion time

Job time (Days) date (Flowtime) Lateness
A 30 40 30 0
C 40 125 70 0
D 35 130 105 0
B 20 165 125 0
125 330 0

Average flow time = 82.5

Average lateness = 0
Average no. of jobs in the system = 2.640
Utilization = 37.9%

#17. JOB TIMES (minutes)

  A B C D E
Workstation 101 27 18 70 26 15
Workstation 102 45 33 30 24 10

a. Schedule: B – A – C – D – E
Workstation 101 Workstation 102
Job Processing time Finish time Processing time Start time Finish time Idle time
B 18 18 33 18 51 18
A 27 45 45 51 96 0
C 70 115 30 115 145 19
D 26 141 24 145 169 0
E 15 156 10 169 179 0
37

b. Total idle time for workstation 102 is 37 minutes

B A C D E
18 45 115 141 156

Idle B A Idle C D E
18 51 96 115 145 169 179

10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180