Question

Problem 10-05 (Algorithmic) The Metropolitan Bus Company (MBC) purchases diesel fuel from American Petroleum Supply. In addition to the fuel cost, American Petroleum Supply charges MBC $150 per order to cover the expenses of delivering and transferring the fuel to MBC's storage tanks. The lead time for a new shipment from American Petroleum is 10 days; the cost of holding a gallon of fuel in the storage tanks is $0.05 per month, or $0.6 per year; and annual fuel usage is 50,000 gallons. MBC buses operate 250 days a year. What is the optimal order quantity for MBC

Answer 1

Answer:

456 Gallons

Explanation:

The Optimal order quantity can be found using the following formula:

Economic Order Quantity = Sqrt (2* Annual Demand * Ordering cost per order / Holding cost per unit per year)

EOQ= SquareRoot (2 * 50000 Gallons * $150 per order/ 0.48 Holding costs)

Economic Order Quantity = 456 Gallons