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 $103 each. The firm uses 5,200 canisters per year. The controller estimates that it costs $158 to place and receive a typical order of XL-20. The annual cost of storing XL-20 is $4.80 per canister. Now also assume that the lead time required to receive an order of XL-20 is one month. Required: Assuming stable usage of XL-20 each month, determine the reorder point for XL-20. Suppose that monthly usage of XL-20 fluctuates between 333 and 533 canisters, although annual demand remains constant at 5,200 canisters. What level of safety stock should the materials and parts manager keep on hand for XL-20? What is the new reorder point for the chemical?

order point canisters

Suppose that monthly usage of XL-20 fluctuates between 333 and 533 canisters, although annual demand remains constant at 5,200 canisters. What level of safety stock should the materials and parts manager keep on hand for XL-20? What is the new reorder point for the chemical? (Round your answer to nearest whole number.)

	Safety stock canisters New reorder point canisters

Answer 1

Reorder point = Average daily units sales X delivery lead time
                    = (5200/360) X 30days                                                  (Assumed 360days in a year)
                    = 433.33 or 433 canisters

Safety Stock = (Maximum daily usage X Maximum lead time) - (Average daily usage X Average lead time)
                   = ((533/30) X 30) - (5200/360 X30)
                  = (533 - 433) = 100 canisters

New Reorder point = 433 + 100 = 533 cannisters