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 $113 each. The firm uses 6,600 canisters per year. The controller estimates that it costs $168 to place and receive a typical order of XL-20. The annual cost of storing XL-20 is $5.80 per canister.

1. Use the EOQ formula to determine the optimal order quantity.
2. What is the total annual cost of ordering and storing XL-20 at the economic order quantity?
3. How many orders will be placed per year?
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 $37.20 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 $38. 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?

5.Assuming stable usage of XL-20 each month, determine the reorder point for XL-20.

6.Suppose that monthly usage of XL-20 fluctuates between 450 and 650 canisters, although annual demand remains constant at 6,600 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?