Question

Sam buys fuel for his construction vehicles from the local distributer. He uses 8,500 gallons a month. The local distributor charges him $20.50 per order when he orders and it costs him $9.00 per gallon per year to store the gas at his farm. The distributer can arrive within an hour of his order and we have a 500 gallon tank he can fill. From a logical and reasonable standpoint, how much fuel should Sam order when he calls the distributer? (Remember how big the tank for his gas is)

Answer 1

Answer:

He should order 681.66 gallons to minimize the cost, but he have a 500 gallon tank he can fill, so he will order 500 gallons every time, to minimize the cost.

Explanation:

According to the given data we have the following:

h = handling cost per unit = $ 9

S = Ordering cost per order = $20.5

He uses 8,500 gallons a month, therefore, the annual demand D= 8,500*12 = 102,000 gallons .

Therefore, the optimal ordering quantity would be= [ (2*D*S) / h ]1/2

                                                                                   =681.66 units

He should order 681.66 gallons to minimize the cost, but he have a 500 gallon tank he can fill, so he will order 500 gallons every time, to minimize the cost.