Question

The Chemco Company uses a highly toxic chemical in one of its manufacturing processes. It must have the product delivered by special cargo trucks designed for safe shipment of chemicals. As such, ordering (and delivery) costs are relatively high, at $3600 per order. The chemical product is packaged in 1-gallon plastic contain- ers. The cost of holding the chemical in storage is $50 per gallon per year. The annual demand for the chemical, which is constant over time, is 7000 gallons per year. The lead time from time of order place- ment until receipt is 10 days. The company operates 310 working days per year. Compute the optimal order quantity, total minimum inventory cost, and the reorder poin

Answer 1

Answer:

Annual demand (D) =7,000 gallons

Ordering cost per order (Co) = $3,600

Holding cost per item per annum (H) = $50

EOQ = √2DCo

               H

EOQ  = √2 x 7,000 x $3,600

                      $ 50

EOQ  = 1,004 units

Q  = 1,004

Total minimum inventory cost

=  Total ordering cost +  Total holding cost

=  DCo  + QH

      Q          2

= 7,000 x $3,600  + 1,004 x $50

        1,004                        2

=  $25,099.60 + $25,100

= $50,199.60  

Re-order point  

=  Maximum  usage per day x  Maximum lead time    

=   7,000 gallons x 10 days

      310 days  

=  226 units                                                                                                                                                                                                      

Explanation:

EOQ is a function of square root of 2 multiplied by annual demand and ordering cost per order divided by holding cost per item per annum.

Total minimum inventory cost is the aggregate of total ordering cost and total holding cost.

Re-order point is the product of maximum usage per day and        maximum lead time.

Maximum usage per day is annual demand divided by the number of working days in a year.