Question

Fiber Technology, Inc., manufactures glass fibers used in the communications industry. The company's materials and parts manager is currently revising the inventory policy for XL-20, one of the chemicals used in the production process. The chemical is purchased in 10-pound canisters for $107 each. The firm uses 6,000 canisters per year. The controller estimates that it costs $162 to place and receive a typical order of XL-20. The annual cost of storing XL-20 is $5.20 per canister.

Required:

2. Use the EOQ formula to determine the optimal order quantity.

3. What is the total annual cost of ordering and storing XL-20 at the economic order quantity?

4. How many orders will be placed per year?

5. Fiber Technology’s controller, Jay Turnbull, recently attended a seminar on JIT purchasing. Afterward he analyzed the cost of storing XL-20, including the costs of wasted space and inefficiency. He was shocked when he concluded that the real annual holding cost was $31.20 per canister. Turnbull then met with Doug Kaplan, Fiber Technology’s purchasing manager. Together they contacted Reno Industries, the supplier of XL-20, about a JIT purchasing arrangement. After some discussion and negotiation, Kaplan concluded that the cost of placing an order for XL-20 could be reduced to just $32. Using these new cost estimates, Turnbull computed the new EOQ for XL-20 a. Use the equation approach to compute the new EOQ.b. How many orders will be placed per year?

1.Use the EOQ formula to determine the optimal order quantity. (Round your answer to nearest whole number.)

2.What is the total annual cost of ordering and storing XL-20 at the economic order quantity? (Round intermediate calculations and final answer to nearest whole number.)

3.How many orders will be placed per year? (Round intermediate calculations and final answer to nearest whole number.)

4. Fiber Technology’s controller, Jay Turnbull, recently attended a seminar on JIT purchasing. Afterward he analyzed the cost of storing XL-20, including the costs of wasted space and inefficiency. He was shocked when he concluded that the real annual holding cost was $31.20 per canister. Turnbull then met with Doug Kaplan, Fiber Technology’s purchasing manager. Together they contacted Reno Industries, the supplier of XL-20, about a JIT purchasing arrangement. After some discussion and negotiation, Kaplan concluded that the cost of placing an order for XL-20 could be reduced to just $32.00. Using these new cost estimates, Turnbull computed the new EOQ for XL-20.

a. Use the equation approach to compute the new EOQ. (Round your answer to nearest whole number.)
b. How many orders will be placed per year? (Round your answer to nearest whole number.)

Answer 1

As per the demand of the question :-

PURCHASER :- FIBER TECHNOLOGY INC...,

RAW MATERIAL :- XL-20 a chemical.

(1) Determining optimal order quantity :-

EOQ = It is the level of the order with carrying cost and ordering cost at optimum level.

Components to ascertain EOQ are as follows  

Annual Demand (A) = 6000 cisterns ; Delivery cost to receive an order = $162 ; annual cost storing each cistern = $5.2.

EOQ = Square root of { 2x6000x$162 / $5.2 } ;

= square root of { 373846.153846} ;

= 611.429598

= 611 .{ being rounded off to nearest whole number. }

Therefore ,optimal order quantity = 611 cisterns.

(2)  What is the total annual cost of ordering and storing XL-20 at the economic order quantity?

Ans :- Total annual cost of ordering = {Annual demand/EOQ} x delivery cost ;

= {6000/611} X $162

= $ 1590.83469721

= $ 1591. { being rounded off to nearest whole number. }

Total cost of storing = {EOQ/2 } X Annual handling cost per cistern.

= {611/2 } x $ 5.2

= $1680.25

= $1680 { being rounded off to nearest whole number }.

3.How many orders will be placed per year? (Round intermediate calculations and final answer to nearest whole number.)

Ans) Number of orders per annum = Total annual demand of cisterns / Size of each order (here EOQ).

= 6000/611

= 9.81996

= 10 { being rounded off to nearest whole number.}

(4) Calculation of New EOQ i.e revised EOQ.

Annual demand = 6000; ordering cost = $32; carrying cost = $ 5.2.

New EOQ = square root of { annual demand x ordering cost. } / carrying cost ;

= square root of { 6000 x $32 / $ 5.2} ;

= square root of { 36923.076923};

= 192.1537

= 192 cisterns . { being rounded to nearest whole number.}

(4B) How many orders will be placed per year? (Round your answer to nearest whole number.)

Ans:- No.of orders per year = total demand per annum / EOQ;

= 6000 cisterns / 192

= 31.25

= 31 cisterns . { being rounded off to nearest whole number.