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 $96 each. The firm uses 4,000 canisters per year. The controller estimates that it costs $151 to place and receive a typical order of XL-20. The annual cost of storing XL-20 is $4.10 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 Technologys 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 $20.20 per canister. Turnbull then met with Doug Kaplan, Fiber Technologys 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 $21. Using these new cost estimates, Turnbull computed the new EOQ for XL-20.

1. a. Use the equation approach to compute the new EOQ.

2. b. How many orders will be placed per year?

Required:

1. Prepare a table showing the total annual cost of ordering and storing XL-20 for each of the following order quantities: 400, 1,000, and 2,000 canisters.

Now also assume that the lead time required to receive an order of XL-20 is one month. Required:

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

3. Suppose that monthly usage of XL-20 fluctuates between 233 and 433 canisters, although annual demand remains constant at 4,000 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 size 400 1000 2000 Number of orders Ordering cost Average inventory Holding costs Total annual costs