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 $95 each. The firm uses 4.800 canisters per year. The controller estimates that it costs $150 to plate and receive a typical order of XL-20 The annual cost of storing XL-20 is $4 per canister.
Required:
1. Write the formula for the total annual cost of ordering and storing XL-20
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 the concluded that the real annual holding cost was $19.20 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 $20. 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?
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