Question

Rally Communications Company manufactures glass fibres used in the communications industry. The company's materials and parts manager is currently revising the inventory ordering policy for XL-20, one of the chemicals used in the production process. The chemical is purchased in 10-kilogram canisters for $95 each. The firm uses 4 800 canisters per year. The accountant estimates that the incremental costs of ordering and receiving XL-20 are $150 per order. The annual cost of storing XL-20 is $4 per canister. The lead time required to receive an order of XL-20 is one month.

Required:

1)

Use the formulato determine the optimal order quantity for XL-20.

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

5)Suppose that monthly usage of XL-20 fluctuates between 300 and 500 canisters, although annual demand remains constant at 4 800 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?