Bus Adm 370 Introduction to Supply Chain Management:
Homework 3 (50 points):
For all the problems, you have to show your complete and accurate work to receive full scores. If
you only provide the final answers without showing your computations, even your answer is correct,
you will not be assigned a full score (or if your answer is wrong, you will miss the opportunity of
receiving any partial credit).
Problem 1: (16 points)
A produce distributor uses 1,200 packing crates a month, and each crate is purchased at a cost of $16. The manager
has assigned an annual carrying cost of 20 percent of the purchase price per crate. Ordering costs are $40. Currently
the manager orders once a month.
a) What is the Economic Order Quantity (EOQ) for this product? (4 pts)
b) How much could the firm save annually in total holding and ordering costs by ordering at the EOQ level? (8 pts)
(Show the computations for the ordering, carrying and total holding and ordering costs in detail)
c) What would the net change (with its direction) in the ordering cost be by ordering at the EOQ level? (2 pt)
d) What would the net change (with its direction) in the carrying cost be by ordering at the EOQ level? (2 pt)
Problem 2: (18 points)
A manager has just received a revised price schedule from a vendor. What order quantity should the
manager use in order to minimize total costs? Annual Demand is 120 units, ordering cost is $8, and annual
carrying cost is $1 per unit.
Problem 3: (16 points)
Milk is stocked at the grocery store each week. At the end of the week unsold milk is reduced in price by
70% and always sells for this lower price instantly. If weekly demand for milk is normally distributed
with a mean of 200 gallons and standard deviation of 25 gallons, find the price for which a fresh gallon of
milk sells. Assume a service level of 95% and that the store purchases milk for $2 per gallon.
Bonus Problem: (6 points) (Bonus points will be added to your homework score).
A newspaper boy is trying to perfect his business in order to maximize the money he can save for a new
car. Daily paper sales are normally distributed, with a mean of 100 and standard deviation of 10. He sells
papers for $0.50 and pays $0.30 for them. Unsold papers are trashed with no salvage value. How many
papers should he order each day and what % of the time will he experience a stockout? Are there any
drawbacks to the order size proposed and how could the boy address such issues?
