Fiber Technology, Inc., manufactures glass fibers used in the communications ind
ID: 2514551 • Letter: F
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.
Required:
Use the EOQ formula to determine the optimal order quantity.
What is the total annual cost of ordering and storing XL-20 at the economic order quantity?
How many orders will be placed per year?
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 $27.20 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 $28. 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?
Explanation / Answer
Annual demand (D): 5200 units
Holding cost(I): $ 4.80 per unit
Ordering cost (O): $ 158 per order
EOQ = (2DO /I)2 = (2*5200*158 /4.80)2 = 585 units
Annual ordering cost = (5200/585) orders *158 = $ 1404
Annual Holding cost = (585 /2)@4.80 = $1404
Number of orders placed = Demand/ EOQ = 5200 /585 = 8.89 orders
Q2. Demand: 5200 units
Ordering cost (O) = 28
Holding cost (I) = 27.20 per unit
Equation for EOQ:
Ordering cost = Holding cost
(Demand /EOQ) *O = (EOQ /2) *I
(5200 / EOQ) *28 = (EOQ /2)*27.20
EOQ = 133 units
Number of order= Demand /EOQ = 5200 /133 = 39 orders
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