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Economic Order Quantity Models - Graduate Level

The information technology department of a university buys paper for its copier machine frequently. The office manager would like to determine the best quantity to order each time an order is placed. She has estimated that the ordering cost is $12 each time an order is placed. The monthly demand for paper is 135 reams (500 sheets to a ream). The cost of paper is $6.50 per ream, and the carrying cost is 25 percent of the paper cost per month. Base your answers to the following questions on the economics that are provided and using the traditional inventory models we have studied.

a) How many reams should be ordered at a time?

b) Suppose the information technology department of the university only has space to hold 35 reams of paper at any time. How many reams should be ordered at a time? Why?

c) There are 350 working days per year and the lead time is 3 days. What are the reorder point and the inventory position immediately after placing the order?

d) If the university were to order at least 60 reams of paper every time it places an order, the paper company will lower the price of the paper by $0.33 for all reams of paper. The university can now acquire all of the storage space that it needs. However, it will cost the university an additional $1.00 per ream per month for storage. What is the difference in the annual inventory cost between this policy and the policy found in a)? Consider all relevant costs.

Solution Preview


Given that,
Ordering Cost=$12
Monthly demand for paper=135 reams (1ream=500 sheets)
Cost of paper=$6.50 per ream
Carrying cost=25% of the paper cost per month
We have,
Economic Order Quantity=√((2*12*135)/($6.50*25%))=44.65≈45 units
If the space available for only 35 reams then in this situation the ...

Solution Summary

Economic order quantity models in graduate levels are examined.