MAN 6501 - Operations Management
MID-TERM EXAMINATION 2

Page 1 of 16

Q 1:
Consider a firm with a daily demand of 100 units, a production rate per day of 500 units, a setup cost of $200, and an annual holding cost per unit of $10. Suppose that the firm operates 300 days per year. How many units of inventory must their storage area be able to hold?
a) close to 975
b) close to 980
c) close to 1095
d) close to 1224
e) close to 1225
Answer: b

Solution
EPQ =

2 DS
 d
H 1 − 

p



EPQ = 1224.74
Max Inventory, Imax = EPQ * (1-d/p) = 1224.74* (1-100/500) = 979.92
Storage Capacity = Max Inventory = 980
Q 2:
If annual demand is 24,000 units, orders are placed every 0.5 months, and the cost to place an order is $50, what is the annual ordering cost?
a)
b)
c)
d)
e)

50
600
1200
2400
Can not be determined

Answer: c

Solution
Number of Orders = 24
Annual Ordering Cost = 24 * 50 = 1200
Q 3:

If the Economic Order Quantity (EOQ) is ordered, which of the following is true?
a) Annual ordering cost exceeds annual holding cost.
b) Annual holding cost exceeds annual ordering cost.
c) Annual ordering cost is equal to annual holding cost.
d) The sum of annual ordering cost plus annual holding cost is maximized.
e) The annual holding cost curve is decreasing.

Answer: c
Page 2 of 16

Q 4:
The basic Economic Order Quantity (EOQ) model can be considered a special case of the
Economic Production Quantity (EPQ) model under which of the following condition?
a) The demand per day is greater than production per day.
b) The production rate per day approaches 0.
c) The production rate per day approaches infinity.
d) The back order cost approaches infinity.
e) d/p = 1, where d is the demand per day and p Is the production per day.
Answer: c

Solution
EOQ =

2 DS
H

EPQ =

2 DS
 d
H 1 − 

p

