Introduction of Inventory Management

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```					Chapter 8: On Inventory Management.

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INTRODUCTION
==================

The shape of the total inventory costs curve (this is a graph plotted with size of
order quantity on the X axis and total inventory costs on the Y axis) can be
either relatively flat or a saucer with relatively steep sides. This determines
whether the firm will face large or small cost penalties if (1) its estimates of
order costs and carrying costs are off by some percentage and (2) its
calculations of Economic Order Quantity (EOQ) are in error. The computer
helps us to identify what causes the shape of the total inventory cost-curve to
be either relatively flat or alternatively more U-shaped.

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acbfdf62-f112-45f2-b8bf-80fa29edde47.xls
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QUESTIONS
==================
1) You are given the following data:

Firm A        Firm B        Firm C          Firm D
V               \$0.10        \$50.00         \$0.10           \$0.50
U               1,000         1,000         1,000           1,000
F                 \$20           \$20           \$20             \$20
CP              \$0.01         \$0.01           \$20             \$20

where
V     =   Variable ordering costs per order
U     =   Annual usage in units
F     =   Fixed ordering costs
CP    =   Carrying cost in dollars per unit of inventory

For each of firms A, B, C, and D, do the following:

a) Look at the calculation of EOQ (Screen #3).

b) Call up the graph.

c) Look at the table of total inventory costs and its components (Screen #4).

d) At the lowest total inventory costs, what is the relation between variable ordering costs
and variable carrying costs?

2) For which firm is EOQ the largest? Smallest? Why?

3) For which firm is the EOQ relatively insensitive to the size of order quantity (flat total cost of
inventory)? Why is this so?

4) Make up your own questions by varying any assumptions.

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acbfdf62-f112-45f2-b8bf-80fa29edde47.xls
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CALCULATION OF ECONOMIC ORDER QUANTITY
========================================

FIRM X

V = \$400.00 = Variable ordering costs per order
U=       3,000 = Annual usage in units
F = \$4,000 = Fixed ordering costs
CP = \$14.00 = Carrying cost in dollars per unit of inventory
-------------------------------------------------------------------------------------------------------------------------

2VU
EOQ =
CP
2  x  400 x 3000
EOQ =                   [ ———————————————————— =
]                                                 414.04 units
14

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acbfdf62-f112-45f2-b8bf-80fa29edde47.xls
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TABLE OF INVENTORY COSTS ( FIRM X )
===========================================
Total       Total
Fixed     Variable    Variable        Total
Order     Ordering    Ordering     Carrying    Inventory
Quantity      Costs        Costs       Costs        Costs

50.0    \$4,000.0   \$24,000.0      \$350.0      \$28,350.0
100.0    \$4,000.0   \$12,000.0      \$700.0      \$16,700.0
150.0    \$4,000.0    \$8,000.0    \$1,050.0      \$13,050.0
200.0    \$4,000.0    \$6,000.0    \$1,400.0      \$11,400.0
250.0    \$4,000.0    \$4,800.0    \$1,750.0      \$10,550.0
300.0    \$4,000.0    \$4,000.0    \$2,100.0      \$10,100.0
350.0    \$4,000.0    \$3,428.6    \$2,450.0       \$9,878.6
400.0    \$4,000.0    \$3,000.0    \$2,800.0       \$9,800.0
414.0    \$4,000.0    \$2,898.3    \$2,898.3       \$9,796.6
500.0    \$4,000.0    \$2,400.0    \$3,500.0       \$9,900.0
550.0    \$4,000.0    \$2,181.8    \$3,850.0      \$10,031.8
600.0    \$4,000.0    \$2,000.0    \$4,200.0      \$10,200.0
650.0    \$4,000.0    \$1,846.2    \$4,550.0      \$10,396.2
700.0    \$4,000.0    \$1,714.3    \$4,900.0      \$10,614.3
750.0    \$4,000.0    \$1,600.0    \$5,250.0      \$10,850.0
800.0    \$4,000.0    \$1,500.0    \$5,600.0      \$11,100.0
850.0    \$4,000.0    \$1,411.8    \$5,950.0      \$11,361.8
900.0    \$4,000.0    \$1,333.3    \$6,300.0      \$11,633.3
950.0    \$4,000.0    \$1,263.2    \$6,650.0      \$11,913.2
1,000.0    \$4,000.0    \$1,200.0    \$7,000.0      \$12,200.0

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acbfdf62-f112-45f2-b8bf-80fa29edde47.xls
ECONOMIC ORDERING QUANTITY
FIRM X
\$30,000.0

\$25,000.0

\$20,000.0
EOQ =       414.04        units
Inventory Costs

Total Costs for EOQ    \$9,796.6
\$15,000.0

\$10,000.0

\$5,000.0

\$0.0
0.0   200.0           400.0               600.0                  800.0                1,000.0          1,200.0

Units per Order

Fixed Cost      Ordering Cost          Carrying Cost       Total Cost

acbfdf62-f112-45f2-b8bf-80fa29edde47.xls

```
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