Practice Problems For Lot 1

1.
The monthly demand for an item over six (6) month is 32, 19, 12,15,23,12
units, respectively. Using the lot- for lot method, determine the total inventory
cost if the holding cost is P1.5 per unit per month and the ordering cost is P40
per order.
OC P40 per order

H P1.5 per unit per period
Iteration 1
Start the solution process by placing an order for 36 units in January.
Month Jan Feb Mar Apr May Jun

Demand 32 19 12 15 23 12
(kg)
Table 2 Costs incurred for January
Type of cost Description
Ordering cost since the order is placed, we incur and ordering cost
of P40.
Holding cost Assume that the ordered quantity will be received in full at
the beginning of January. Thus, the inventory
level at the beginning of January would be 32 units, and
that at the end of January would be 0. The average
inventory level in February January, therefore, be
32+0
¿
2
= 16 units
The holding cost for January would be 16 x P1.5 or

P24
Iteration 2
Next, place an order for 60 units at the beginning of February that will
completely meet the demand for that month.

Demand 32 19 12 15 23 12
(kg)
Table 3 Costs incurred for February
of P40.
the beginning of February. Thus, the inventory
level at the beginning of February would be 19 units, and
that at the end of February would be 0. The average
inventory level in February would, therefore, be
19+ 0
¿
2
= 9.5 units
The holding cost for February would be 9.5 x P1.5 or

P14.25
Iteration 3
Next, place an order for 60 units at the beginning of March that will completely
meet the demand for that month.

Demand 32 19 12 15 23 12
(kg)
Table 3 Costs incurred for March
of P40.
the beginning of March. Thus, the inventory level
at the beginning of March would be 12 units, and that at
the end of March would be 0. The average
inventory level in March would, therefore, be
12+0
¿
2
= 6 units
The holding cost for March would be 6 x P1.5 or 9

Iteration 4
Next, place an order for 60 units at the beginning of April that will completely

Demand 32 19 12 15 23 12
(kg)
Table 4 Costs incurred for April
of P40.
the beginning of April. Thus, the inventory level at
the beginning of April would be 15 units, and that
at the end of April would be 0. The average
inventory level in April would, therefore, be
15+ 0
¿
2
= 7.5 units
The holding cost for April would be 7.5 x P1.5 or 11.25

Iteration 5
Next, place an order for 60 units at the beginning of May that will completely

Demand 32 19 12 15 23 12
(kg)
of P40.
the beginning of May. Thus, the inventory level at
the beginning of May would be 23 units, and that
at the end of May would be 0. The average
inventory level in May would, therefore, be
23+ 0
¿
2
= 11.5 units
The holding cost for May would be 11.5 x P1.5 or

17.25
Iteration 6
Next, place an order for 60 units at the beginning of May that will completely

Demand 32 19 12 15 23 12
(kg)
of P40.
the beginning of June. Thus, the inventory level at
the beginning of June would be 23 units, and
that at the end of June would be 0. The average
inventory level in June would, therefore, be
12+0
¿
2
= 6 units
The holding cost for June would be 6 x P1.5 or 9
Using the same technique, the total inventory costs, assuming that an order is
placed at the beginning of each month, would completely satisfy the demand for that
month the total inventory costs would be shown in Table
4. Thus, if the lot-for-lot method would be used, the total inventory cost would be
P324.75
Table 4. Lot-for-lot solution summary
Month Ordering cost Holding cost Total cost

January P40 P24 P64
February P40 P14.25 P54.25
March P40 P9 P49
April P40 P11.25 P51.25
May P40 P17.25 P57.25
June P40 P9 P49
Total P240 P84.75 P324.75
2. The monthly demand for an item over six (6) months is 32, 19, 12, 15, 23, and
12, units respectively. Using the Part Period Balancing method, determine the
total inventory cost if the holding cost is P1.5 per unit per month and the
ordering cost is P40 per order.
Iteration 1.1
Start the solution process by placing an order for 32 units in January.

Demand 32 19 12 15 23 12
(kg)
of P40.
the beginning of January. Thus, the inventory
level at the beginning of January would be 23 units, and
that at the end of January would be 0. The average
inventory level in January would, therefore, be
32+0
¿
2
= 16 units
The holding cost for January would be 16 x P1.5 or 24
In this case, the holding cost (24) is less than the order cost (P40).
Therefore, the next step would be to set the order horizon to 2 months -
January and February - and place one order at the beginning of January that
would meet the requirements for both January and February. Perform the
next iteration using this information.
Iteration 1.2
The demand for January is 32 units, and that for February is 19 units. If an
order of 51 units were placed at the beginning of January, the following costs would
be incurred:

Demand 32 19 12 15 23 12
(kg)
Table 6 Costs incurred for January and February
of P40.
Holding cost assuming the ordered quantity of 51 units would be
received in full at the beginning of January, The inventory
level at the beginning of January is 51 units. The
inventory level at the end of January is 19 units. So,
the average inventory level in January would be
51+19
¿
2
= 35 units
The inventory level at the beginning of February would

be 19 units, and at the end of February would
be 0. So, the average inventory level in February
would be.
19+ 0
¿
2
= 9.5 units
The total holding cost for the months of January and

February would, therefore, be:
= (35 + 9.5) x P1.5 =P66.75
At this point, the holding cost (P66.75) has exceeded the cost of placing one
order (P40). Calculate the Cr values:
For Iteration 1.1 the holding cost for ordering 32 units in January is P24.
Thus, Cr would be
Cr =IP 40−P 24 I =P 16
For Iteration 1.2 the holding cost for ordering 51 units in January is P66.75.
Thus,
Cr =IP 40−P 66.75 I =P 26.75

It should be noted that in assessing Cr , it should be focused on comparing
the difference between holding cost and ordering cost; thus, the sign should be
ignored.
Table 7. Closeness factor for January - February order horizon

Parameters January January + February
Cr 16 26.75
Q 32 51
As seen from Table 7, Cr for the lot size of 32 units is smaller for the two (2)
order horizons - January and January and February (or the total holding cost
is closer to the ordering cost). Therefore, conclude that it is economical to place
an order for 32 units in January, which will help meet the demand for January
alone.
Iteration 2.1
Since the demand for February was not included in the previous lot size,
start a new iteration after setting the starting period to February. The demand
For February is 19 units.
Month Jan Feb March Apr May Jun

Demand(kg 32 19 12 15 23 12
)
Table 8. Costs incurred for February
Ordering cost since the order is placed, we incur an ordering

cost of P40.
Holding cost Assume that the ordered quantity will be

received in full at the beginning of February. Thus,
the inventory level at the beginning of February would
be 19 units, and that at the end of February would
be 0. The average inventory level in February would,
therefore, be
19+ 0
¿
2
= 9.5 units
The holding cost for February would be 9.5 × P1.5 or

P14.25
The holding cost of P14.25 is less than the order cost of P40. Therefore, the next step
is to set an order horizon to two (2) months – February and March – and place an
order at the beginning of February that would meet the requirement for both these
months.
Iteration 2.2
In this iteration, set the order horizon to two (2) months - February and March,
and place an order for 31 units at the beginning of February.

Demand 32 19 12 15 23 12
(kg)
of P40.
Holding cost assuming the ordered quantity of 31 units is received in full

at the beginning of February, the beginning inventory level
is 31 units. The inventory level at the end of February is
12 units. Thus, the average inventory level in
February would be:
31+12
¿
2
= 21.5 units
The inventory level at the beginning of March would be

12 units, and at the end of March would be 0. So, the
average inventory level in March would, therefore, be
12+0
¿
2
= 6 units
The total holding cost for the months of February and

March would, therefore, be
= (21.5 + 6) x 1.5 = P41.25
At this stage, the total holding cost of (P41.25) has exceeded the order cost of
(P40). Calculate the Cr values need to be checked.
For Iteration 1.1 the holding cost for ordering 19 units in February is P14.25.
Thus, Cr would be
Cr =IP 40−P 14.25 I =P 25.75
For Iteration 1.2 the holding cost for ordering 31 units in January is P21.5.
Thus,
Cr =IP 40−P 21.5 I =P 18.5
Table 10. Closeness factor for February - March order horizon

Cr 25.75 18.5
Q 19 31
As seen from Table 8, the 𝐶� for February is close to that of the combined February
and March order horizon; therefore, it is economical to place an order for 19 units in
February, which will help meet the demand for February only.
Iteration 3.1
The demand for March was not included as part of the order placed in
February. We, therefore, start a new iteration after setting the initial period to
March. The demand for March is 12 units.

Demand 32 19 12 15 23 12
(kg)
Table 11 Costs incurred for March
Ordering cost Since the order is placed, we incur an ordering

cost of P40.

received in full at the beginning of March. Thus, the
inventory level at the beginning of March would
be 12 units, and that at the end of March would be
0. The average inventory level in March would, therefore, be
12+0
¿
2
= 6 units
The holding cost for March would be 6 × P1.5 =P9
The holding cost (P9) is less than the order cost (P40). Therefore, the
next step is to set an order horizon to 2 months –
March and April – and place one order at the beginning of
March, which would meet the requirements for both
these months.
Iteration 3.2

Demand 32 19 12 15 23 12
(kg)
Table 12. Costs incurred for March and April

cost of P40
Holding cost since we receive the ordered quantity of 27 units

in full at the beginning of March, the inventory
level at the beginning of March is 27 units. The
inventory level at the end of March is 15 units. So,
the average inventory level in March would be
27 +15
¿
2
= 21 units
The inventory level at the beginning of April would be

11 units, and at the end of April would be 0. So, the
average inventory level in April would, therefore, be
15+ 0
¿
2
= 7.5 units
The total holding cost for the months of March and

April would, therefore, be
= (21 + 7.5) × P1.5 = P42.75
Since the total holding cost has exceeded the order cost, check the 𝐶� values:
For Iteration 3.1, the holding cost for ordering 12 units in March is P9. Thus, 𝐶�
would be
𝐶� = |P40 − P9| = P31
For Iteration 3.2, the holding cost for ordering 27 units in March is P42.75.
Thus,
𝐶� = |P40− P42.75| = P2.75
As seen from above, the 𝐶� for the lot size of 27 units is smaller (meaning, the
holding cost is closer to the ordering cost); thus, it is economical to
place an order for 27 units in March, which will help meet the demand for
March only.
Iteration 4.1
The demand for April was not included as part of the order placed in March.
We, therefore, start a new iteration after setting the initial period to April. The demand
for April is 11 units.

Demand 32 19 12 15 23 12
(kg)
Table 13. Costs incurred for April

cost of P40.
Holding cost Since we receive the ordered quantity in full at

the beginning of April, the inventory level at the
beginning of April would be 15 units. The
inventory level at the end of April would be 0. The
average inventory level in April would, therefore, be
15+ 0
=
2
= 7.5 units
The holding cost for April would be 7.5 × P1.5 = 11.25
The holding cost (P11.25) is less than the order cost (P40). Therefore, the
next step is to set an order horizon to 2 months – April and May – and
place one order at the beginning of April that would meet the requirements
for both these months.
Iteration 4.2

Demand 32 19 12 15 23 12
(kg)
Table 14. Costs incurred for April and May

cost of P40
Holding cost since we receive the ordered quantity of 38 units

in full at the beginning of April, the inventory
level at the beginning of April is 38 units. The
inventory level at the end of April is 23 units. So,
the average inventory level in April would be
38+ 23
¿
2
= 30.5 units

23 units, and at the end of April would be 0. So, the
average inventory level in May would, therefore, be
23+ 0
¿
2
= 11.5 units
The total holding cost for the months of April and May
would, therefore, be
= (30.5 + 11.5) × P1.5 = P63
Since the total holding cost has exceeded the order cost, check the 𝐶� values:
For Iteration 4.1, the holding cost for ordering 15 units in April is 11.25. Thus,
𝐶� would be
𝐶� = |P40 − P11.25| = P28.75
For Iteration 4.2, the holding cost for ordering 38 units in April is P63. Thus,
𝐶� = |P40− P63| = P23
Table 14. Closeness factor for February - March order horizon

Cr 28.75 23
Q 15 38
As seen from above, the 𝐶� for the lot size of 38 units is smaller (meaning, the
holding cost is closer to the ordering cost); thus, it is economical to
place an order for 38 units in April, which will help meet the demand for
April and May.
Iteration 5.1
Start a new iteration after setting the starting period to June.

Demand 32 19 12 15 23 12
(kg)
Table 15. Costs incurred for June
Ordering cost since the order is placed, we incur an

ordering cost of P40.
Holding cost since we receive the ordered quantity of 12

units in full at the beginning of June, the
inventory level at the beginning of June is
12 units. The inventory level at the end of June is
0 units. So, the average inventory level in June would be
12+0
¿
2
= 6 units
The holding cost for June would be 6 × P1.5 = P9
Since the demands beyond June are unknown, stop the solution procedure.
Assume that it is economical to place an order for 12 units at the beginning of
June.
The solution produced by the part-period balancing method suggests that

orders placed in January should be 32 units, in February should be 19 units,
in March should be 12 units, in April should be 15 units, and in June should
be 12 units. The total inventory cost for the planning horizon is ₱735.01.
Month Order Ordering cost Holding cost Inventory cost

quantity
January 32 P40 24 64
February 19 P40 14.25 54.25
March 12 P40 9 49
April 15 P40 11.25 51.25
May
June 12 P40 9 49
TC 200 67.5 267.5
3. The monthly demand for an item over six (6) months is 32, 19, 12, 15, 23, and
12, units respectively. Using the Silver-Meal method, determine the total
inventory cost if the holding cost is ₱1.5 per unit per month and the ordering
cost is ₱40 per order.
Iteration 1.1

Demand 32 19 12 15 23 12
(kg)
Table 16. Costs incurred for January

cost of P40.

received in full at the beginning of January. Thus,
the inventory level at the beginning of January would be
36 units, and that at the end of January would be 0.
The average inventory level in January would, therefore, be
32+ 0
=
2
= 16 units
The holding cost for January would be 16 × P1.5 or

P24
Total inventory cost the total inventory cost is P40 + P24 = P64
Per Period Cost (PPC) Since this cost is incurred over one period
(January), the PPC is
P 64
= 1
= P64
Iteration 1.2
The next step would be to set an order horizon to 2 months – January

and February – and place one order at the beginning of January that would
meet the requirements for both these months.

Demand 32 19 12 15 23 12
(kg)
Table 17. Costs incurred for January and February

cost of P40.
Holding cost Assuming the ordered quantity of 51 units

would be received in full at the beginning of
January, the inventory level at the beginning of
January is 51 units. The inventory level at the end of
January is 19 units. So, the average inventory level in January
would be
51+19
=
2
= 35 units
The inventory level at the beginning of February would

be 19 units, and at the end of February would
be 0. So, the average inventory level in February
would be
19+ 0
=
2
= 9.5 units
The total holding cost for the months of January and
February would, therefore, be: = (35 + 9.5) × P1.5 =
P44.5
Total inventory cost The total inventory cost is P40 + P44.5 = P84.5
Per Period Cost (PPC) Since this cost is incurred over two (2) periods
(January and February), the PPC is
84.5
¿
2
= 42.25
Since the PPC for the order horizon of January and February took together is
greater than the PPC for the order horizon for January alone, the Sliver-Meal
heuristic suggests that it is economical to place an order for 32 units at the
beginning of January.
Iteration 2.1
Set the order horizon to February since the demand for this month was
not included in the previous order.

Demand 32 19 12 15 23 12
(kg)
Table 18. Costs incurred for February

cost of P40

received in full at the beginning of February. Thus,
the inventory level at the beginning of February would
be 19 units, and that at the end of February would
be 0. The average inventory level in February would,
therefore, be
19+ 0
¿
2
= 9.5 Units
The holding cost for February would be 9.5 × P1.5 or

P14.25
Total inventory cost The total inventory cost is P40 + 14.25 = P54.25
Per Period Cost (PPC) Since this cost is incurred over one (1) period
54.25
(February), the PPC is ¿
1
= 54.25
The next step is to combine the demands for February and March and
compare the PPC for this horizon with that of February.
Iteration 2.2

Demand 32 19 12 15 23 12
(kg)
Table 19. Costs incurred for February and March

cost of P40.
Holding cost Assuming the ordered quantity of 31 units is

received in full at the beginning of February, the
beginning inventory level is 31 units. The
inventory level at the end of February is 12 units. Thus, the
average inventory level in February would be:
31+0
¿
2
= 15.5 Units
The inventory level at the beginning of March would be

12 units, and at the end of March would be 0. So,
the average inventory level in March would, therefore,
be
12+0
¿
2
= 6 Units
The total holding cost for the months of February and

March would, therefore, be = (15.5 + 6) × P1.5 =
P32.25
(February and March), the PPC is
72.25
¿
1
= 72.25
Since the PPC for the order horizon of February and March took together is
greater than the PPC for the order horizon for February alone, the Silver-Meal
heuristic suggests that it is economical to place an order for 19 units at the beginning
of February.
Iteration 3.1
Start the next iteration by setting the start period to March. The total demand for
March is 85 units.

Demand 32 19 12 15 23 12
(kg)
Table 20. Costs incurred for March
Ordering cost Since the order is placed, we incur an

Holding cost Since we receive the ordered quantity of 12

units in full at the beginning of March, the
inventory level at the beginning of March would
be 12 units, and at the end of March would be 0.
So, the average inventory level in March would, therefore, be
12+0
¿
2
= 6 units
The holding cost for March would be 6 × P1.5 or P9
Total inventory cost The total inventory cost is P40 + P9 = P49 Per
49
Period Cost (PPC) the PPC is, ¿
1
= 49
Iteration 3.2
Take an order horizon of 2 months – March and April.

Demand 32 19 12 15 23 12
(kg)
Table 21. Costs incurred for March and April
Ordering cost Since the order is placed, we incur an

Holding cost Since we receive the ordered quantity of 27 units in

full at the beginning of March, the inventory level
at the beginning of March is 27 units. The inventory
level at the end of March is 15 units. So, the
average inventory level in March would be
27 +15
¿
2
= 21 units

15 units, and that at the end of April would be 0.
So, the average inventory level in April
would, therefore, be
15+ 0
¿
2
= 7.5 units
The total holding cost for the months of March and
April would, therefore, be = (21 + 7.5) × P1.5 =
P42.75
82.75
(March and April), the PPC is =
2
= 41.375
At this stage, the PPC for order horizon March–April is lower than the PPC for March.
Therefore, continue batching demands. Next, set the order horizon to March–April–
May, with the order being received at the beginning of March.
Iteration 3.3

Demand 32 19 12 15 23 12
(kg)
Table 22. Costs incurred for March, April, and May
Ordering cost Since the order is placed, we incur an ordering cost

of P40.
Holding cost Since we receive the ordered quantity of 50 units in full at

the beginning of March, the inventory level at the beginning
of March would be 50 units. The inventory level at the
end of March is 38 units. So, the average inventory level in
March would be
50+38
¿
2
= 44 units
The inventory level at the beginning of April would be 38
units. The inventory level at the end of April is 23 units.
So, the average inventory level in April would be
38+ 23
¿
2
= 30.5 units
The inventory level at the beginning of May would be 39

units. The inventory level at the end of May is 0 units.
So, the average inventory level in May would be
23+ 0
¿
2
= 11.5 units
The total holding cost for the months of March, April, and
May would, therefore, be = (44 + 30.5 + 11.5) × P1.5 =
P129
Total inventory cost The total inventory cost is P40 + P129 = P169
Per Period Cost (PPC) Since this cost is incurred over three (3) periods
169
(March, April, and May), the PPC is ¿
3
= 56.33
At this stage, the PPC for order horizon March–April–May is greater than
the PPC for March–April. Based on the Silver-Meal heuristic, conclude that it is
optimal to place one order of 27 units at the beginning of March. Next, set
the order horizon to May with the order being received at the beginning of
May.
Iteration 4.1
Month Jan Feb Mar Apr May Jun Demand (kg) 36 60 85 11 39 75 Table 23.
Costs incurred for May Type of cost Description Ordering cost Since the order
is placed, we incur an ordering cost of ₱80. Holding cost The inventory level at
the beginning of May would be 39 units. The inventory level at the end of May
is 0 units. So, the average inventory level in May would be = 39 + 0 2 = 19.5
𝑢𝑛𝑖𝑡� The holding cost for February would be 19.5 × ₱1.75 or ₱34.13 Total
inventory cost The total inventory cost is ₱80 + ₱34.13 = ₱114.13 Per Period
Cost (PPC) the PPC is, = ₱114.13 1 = ₱114.13 Iteration 4.2 Month Jan Feb Mar
Apr May Jun Demand (kg) 36 60 85 11 39 75 Table 24. Costs incurred for May
and June Type of cost Description Ordering cost Since the order is placed, we
incur an ordering cost of ₱80. Holding cost Since we receive the ordered
quantity of 114 units in full at the beginning of May, the inventory level at the
beginning of May would be 114 units. The inventory level at the end of May
would be 75 units. So, the average inventory level in May would be = 114 + 75
2 = 94.5 𝑢𝑛𝑖𝑡� The inventory level at the beginning of June would be 75 units,
and at the end of June would be 0. So, the average inventory level in June
would, therefore, be = 75 + 0 2 = 37.5 𝑢𝑛𝑖𝑡� The holding cost for February would
be (94.5 + 37.5) × ₱1.75 or ₱231 Total inventory cost The total inventory cost is
₱80 + ₱231 = ₱311 Per Period Cost (PPC) Since this cost is incurred over two
(2) periods (May and June), the PPC is = ₱311 2 = ₱155.5 The PPC for the
order horizon of May–June is greater than the PPC for May. Therefore, the
optimal order quantity is the demand for May alone (39 units).

Practice Problems For Lot 1

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1.

OC P40 per order

Start the solution process by placing an order for 36 units in January.

Month Jan Feb Mar Apr May Jun

Table 2 Costs incurred for January

Type of cost Description

The holding cost for January would be 16 x P1.5 or

Month Jan Feb Mar Apr May Jun

Table 3 Costs incurred for February

Type of cost Description

The holding cost for February would be 9.5 x P1.5 or

Month Jan Feb Mar Apr May Jun

Table 3 Costs incurred for March

Type of cost Description

The holding cost for March would be 6 x P1.5 or 9

Month Jan Feb Mar Apr May Jun

Table 4 Costs incurred for April

Type of cost Description

The holding cost for April would be 7.5 x P1.5 or 11.25

Month Jan Feb Mar Apr May Jun

Table 3 Costs incurred for February

Type of cost Description

The holding cost for May would be 11.5 x P1.5 or

Month Jan Feb Mar Apr May Jun

Table 3 Costs incurred for February

Type of cost Description

The holding cost for June would be 6 x P1.5 or 9

Table 4. Lot-for-lot solution summary

Month Ordering cost Holding cost Total cost

Start the solution process by placing an order for 32 units in January.

Month Jan Feb Mar Apr May Jun

Table 7 Costs incurred for February

Type of cost Description

The holding cost for January would be 16 x P1.5 or 24

Month Jan Feb Mar Apr May Jun

Table 6 Costs incurred for January and February

Type of cost Description

The inventory level at the beginning of February would

The total holding cost for the months of January and

= (35 + 9.5) x P1.5 =P66.75

Cr =IP 40−P 66.75 I =P 26.75

Table 7. Closeness factor for January - February order horizon

Month Jan Feb March Apr May Jun

Table 8. Costs incurred for February

Type of cost Description

Ordering cost since the order is placed, we incur an ordering

Holding cost Assume that the ordered quantity will be

The holding cost for February would be 9.5 × P1.5 or

Month Jan Feb Mar Apr May Jun

Table 9 Costs incurred for February

Type of cost Description

Holding cost assuming the ordered quantity of 31 units is received in full

The inventory level at the beginning of March would be

The total holding cost for the months of February and

= (21.5 + 6) x 1.5 = P41.25

Cr =IP 40−P 21.5 I =P 18.5

Table 10. Closeness factor for February - March order horizon

Month Jan Feb Mar Apr May Jun